Uganda Revenue authority officials tend to taxpayers during customer appreciation week in Kampala. Photo: Morgan Mbabazi/World Bank.
Less than one million people and about 40,000 firms are registered as tax payers in Uganda. That’s less than 7% of the total working age population, and less than 10% of firms with a fixed location, respectively.
While this is low on both scores, it represents a significant improvement over the last couple of years thanks to the enormous efforts by Uganda Revenue Authority to improve tax administration. A large proportion of persons and firms remain outside the tax bracket, however. Some households are too poor to pay taxes, and many small businesses operate in the informal economy and are hard-to-reach. That said, many people and firms deliberately evade taxes or are granted generous exceptions. This is something that can and should be addressed right away.
Uganda collects taxes equivalent to 14% of GDP. This is too low; it’s below the government's own target of 16% set three years ago, and below what the country can collect—an estimated 18-23% of gross domestic product (GDP.) It is also below what its neighbors collect—Kenya 18%, Rwanda 16%.
A low tax effort contributes to fiscal deficits and limits opportunities for financing infrastructure and social services. While governments can borrow to fund vital infrastructure and human capital, they cannot do so indefinitely without running up debt, an issue that is quickly emerging as a concern in many African countries. An improved tax collection is therefore critical to sustainably finance human capital and infrastructure while containing the rise in external debt. In addition, public investments, whether funded through domestic or external resources, need to be well managed—carefully prioritized, competitively procured, well supervised and maintained. When the latter is not the case, value for money is compromised. An increasing debt service is especially hard to stomach when public investments are ill-managed.
In recent years, aid flows to Uganda have slowed while the country needs to scale up the financing of important infrastructure, and continue to build human capital through the provision of better education and health services on the back of a rapidly-increasing population. Uganda needs to urgently increase the mobilization of domestic revenues to stay its development course and not compromise fiscal stability. If, for instance, revenues collected over the past three years had met the target of 16% instead of just 14%, the additional 2% would have been sufficient to triple government’s spending in the health sector in FY2016/17, or fully finance the Entebbe-Kampala expressway without having to borrow.
So, what can Uganda do to raise more domestic revenues? An obvious first step is to reduce policy discretion, i.e., decrease the granting of tax exemptions. That could yield 4-5% of GDP in additional revenue. Second, make more people and firms pay taxes. Third, the government needs not only to promote equity in tax enforcement and administration, but also improve transparency and accountability while demonstrating a clear link between taxes and public services and strengthening the social contract. The government has in recent years improved public expenditure and budget transparency. It is now a high priority to improve transparency and accountability in the collection and management of public revenues.
The above are key recommendations from the 11th edition of the Uganda Economic Update series released today in Kampala. The report, “Financing Growth and Development: Options for Raising Domestic Revenues in Uganda,” reviews the state of the economy and focuses on how Uganda can mobilize more domestic revenues to provide better access to and quality of public services.
The Government of Uganda is in the process of formulating a medium-term domestic revenue strategy. This process provides an opportunity to review past approaches to revenue mobilisation, discuss options for tax policy and tax administration, and recommend reforms that will put the revenue-to-GDP ratio on an upward trajectory. It also provides an opportunity for the government and broader public to establish a new social contract.
Contracts rest on a sense of mutual responsibility with the rights and obligations of all parties clearly defined. A new social contract in Uganda can provide the basis for the government to deliver better public services to citizens and firms, while requiring citizens and firms to appropriately pay their taxes. Making bold decisions now to diversify and increase tax revenues will better position Uganda to use future oil windfall for strategic physical and human capital investments, and also to save for a future when the oil runs out.