The Ugandan taxpayer is losing close to 3 trillion Shillings a year in revenue foregone due to the tax expenditures benefiting different kinds of persons.
Over the past five financial years, the value of revenue foregone has grown nominally, from 2.079 trillion in 2018/2019 to 2.97 trillion Shillings in 2022/2023, representing an increase of 43 per cent. The value foregone is equivalent to 12.5 per cent of the total revenues (23.73 trillion) collected by URA in that year.
The Ministry of Finance, Planning and Economic Development estimates that the financial year just ended (2023/2024), and tax expenditures were 3.42 trillion Shillings, compared to the 27 trillion Shillings collected by URA that year.
Expressed as a percentage of GDP, revenue foregone has remained relatively constant, increasing only from 1.57 in 2018/19 to 1.62 per cent of GDP in 2022/23.
Broadly defined, tax expenditures refer to any reductions in tax liability compared with a benchmark or ‘normal’ tax system, which can take the form of exemptions, allowances, rate reliefs, credits, and deferrals.
The Ministry’s analysis of the tax expenditures covers revenue foregone under Personal and Corporate Income Taxes, VAT, Customs Duties, and Excise Duty.
Based on estimates, VAT is the tax head where the revenue foregone associated with tax expenditures is highest, at 992.2 billion shillings in FY2022/23, accounting for 33.3 per cent of the total revenue foregone from tax expenditures in Uganda.
The ministry emphasises that the headline figures in the report are only estimates because of data availability limitations, making it difficult to calculate the revenue foregone.
“It is important to note that this lack of data means that the headline aggregated numbers are underestimated, particularly the estimates of revenue foregone under VAT that primarily focus on imported goods and thus underestimate TE on local sales and purchases,” it says.
The Ministry does not give an entire view of tax expenditures, though they are sometimes unavoidable.
“A tax system should strive to be neutral (that is, not unduly influence the behaviour of firms or individuals), but the presence of incentives or exemptions may result in an inefficient allocation of resources across the economy.”
Under the Personal Income Tax segment, 468 billion Shillings were foregone in 2022/23, up from 323 billion in 2018/2019. Defence and security agencies and parliament accounted for over half of the foregone revenue in exemptions on their payments.
Over the five years, the most significant increase in foregone revenue was under the Corporate Income Tax, jumping from 168.5 billion to 350.6 billion shillings, a 108 per cent increase.
The report shows a significant increase in the most recent fiscal year due to the rate relief on payments for supplying technical and other services provided directly and exclusively for the East African Crude Oil Pipeline (EACOP) project.
This amounted to 123 billion shillings. Another cost under this was an exemption for the income of the Bujagali Hydro Power Project for five years up to 2022, which has steadily dropped from 108.4 billion to 80.7 billion shillings. However, the incentive for the Bujagali project was extended for another five years to 2027.
Other items under this included the income of a Savings and Credit Cooperative Society up to June 30, 2027, the Exemption from CIT of the Deposit Protection Fund’s income, and the Corporation Tax holiday for the East African Crude oil pipeline company. Still, data on the two was not captured.
Notably, revenue foregone under the VAT has fallen by 0.6 percentage points from 2021/22 to 2022/23, by 0.06 percentage points. The primary source of foregone revenue under the VAT comes from Allowances, deemed VAT, which accounts for 75 per cent of revenue foregone under VAT in the most recent financial year.
In total, VAT Exemptions amounted to 134 billion Shillings, mainly from exemptions on agricultural inputs, machinery and tools, the supply of menstrual cups, animal feed inputs, batteries and lanterns, and solar equipment.
Others were the supply of processed milk, liquefied gas and furniture made in Uganda. Under VAT Rate Relief, revenue foregone amounted to 117.37 billion shillings from relief for the supply of educational material, sanitary towels and cereals.
Allowances under the VAT, foregone revenues amounted to 741 billion Shillings.
The items included Deemed VAT payment on supplies by a contractor to a licensee under mining or petroleum operations, Deemed VAT on supplies to a contractor executing an aid-funded project and Deemed VAT on supplies by contractors executing aid-funded projects to a government ministry, department or agency.
Total revenue foregone under customs duty has increased from 560 billion to 794 billion shillings in 2022/23, representing an increase of 42 per cent in nominal terms over the five years.
Tax Expenditure under Excise Duty featured tax reliefs on beer, wine, spirits and furniture, all made with a high percentage of locally acquired raw materials and on incoming international calls. The total tax foregone under this dropped from 399.41 billion to 376.3 billion Shillings.
Revenue was foregone due to Stays of Application by the CET Chapter on dozens of items, amounting to 423 billion shillings, while Duty Remissions by the CET Chapter amounted to 315.7 billion.
Revenues foregone on Aid-Funded Projects fell from 1.98 trillion in 2018/2019 to 511.8 billion shillings.
–URN
