Last week, the International Monetary Fund, (the go-to people in case you run short of foreign exchange), gave the Uganda government a pat on the back for successfully steering the country through the economic aftershocks of the Covid-19 pandemic.
Towards mid-2020, and through the Rapid Credit Facility which caters for developing countries facing urgent balance of payments needs, the IMF approved $491.5 million in emergency assistance to Uganda.
Current economic growth is running just above 6 percent compared to 5.3 percent during financial year (FY) 2022/23 and a substantial jump from FY19/20 when it was just 3.1%.
In a statement the IMF said Uganda had navigated the post-pandemic recovery well due to sound macroeconomic policies. It goes on to state the economic recovery is strengthening with low inflation, favourable agricultural production, and strong industrial and services activity.
But at the same time, the technocrats from Washington, on a routine visit to Kampala in May, cautioned that more needs to be done about raising tax revenues. With a tax-to-GDP ratio of about 14%, Uganda continues to lag behind its neighbours although none in the region is anywhere close to the ideal figure of 20%.
Although the government has been consistent in trying to reduce dependency on external sources, Uganda still struggles to finance the development part of the national budget. Future earnings from oil exports will certainly help bridge the deficit, but the IMF said not to discount potential delays in oil production.
IMF consultations with government officials come under the Article IV provisions that call for transparency in publicizing their findings on Uganda’s economic prospects. In their report which was completed in August, the authors say low tax revenues constrain Uganda’s fiscal policy space.
According to the report, ‘The relationship with development partners continues to be strained due to limited progress in addressing long-standing governance weaknesses, and more recently by the enactment of the Anti-Homosexuality Act (AHA). Over the years, concessional financing has declined significantly, impacting the government’s ability to secure low-cost financing’.
‘Governance weaknesses’ is one of the favoured terms the international donor community frequently uses as a polite way of describing everything to do with corruption in the public sector.
Coincidentally, top finance officials led by the Minister, Matia Kasaija, were last week laying out plans for improving revenue collection to fund the 2025/26 national budget. The centerpiece is implementation of the Domestic Revenue Mobilisation Strategy (DRMS) with tax evasion as one of the key areas to address.
Earlier this year, Advocates Coalition for Development and Environment (Acode), a locally-based independent public policy research and advocacy organisation, and the non-profit, Global Financial Integrity, looked into the problem.
One of their more significant findings was that almost half of all economic activities in Uganda are informal. That alone is a major structural constraint on domestic revenue growth, because many Ugandans conduct business wholly or partially outside the tax system. From their research, Acode and GFI said the informal sector costs Uganda’s economy over 40% of GDP annually due to tax evasion.
Dutch researcher, Jelte Verberne concluded from his own findings: “Tax morale among small and medium-sized enterprises in Kampala is low. The people working at or owning SMEs do not like to or want to pay taxes. There is a lot of mistrust towards the authorities which are often perceived as corrupt. ”
For an adult population of roughly 20 million, only 3.5 million Ugandans are registered taxpayers, with income taxpayers making up about 2.5 million. On the other hand, more research commissioned by the International Growth Centre, showed that only five percent of company directors and an insignificantly small proportion of high-ranking government officials, many of whom possess extensive assets, pay personal income tax.
According to finance officials, DRMS was developed in collaboration with government institutions and key stakeholders including the Uganda Revenue Authority (URA), Development Partners and Civil Society. DRMS was adopted in October 2019, but then shelved due to the outbreak of the Covid-19 pandemic.
With all the tensions surrounding this health threat, many Ugandans might have missed Kasaija’s remarks concerning DRMS, “It is important to recognise the role played by all arms of Government and Ugandan society in securing our financial independence. Future resource mobilization efforts depend on Ugandans perceiving a closer link between taxes paid and public services enjoyed by citizens. As Government, we have a responsibility to strengthen this fiscal-social contract and redouble our efforts to stamp out corruption at every level. In return, we are expecting everyone with the means to pay their taxes.”
The core objective of DRMS is to improve revenue collection by enhancing the tax-to-GDP ratio to between 16% and 18% in the next five financial years. It involves the juggling of three competing objectives; to raise additional revenues to finance the government’s budgetary priorities; to encourage a healthy flow of investments; and to address issues of fairness and transparency in the tax system.
Crystal Kabajwara, now the chair of the Tax Appeals Tribunal, was previously a Business Advisor with PwC Uganda. In 2023 she said, “We cannot separate the tax- to-GDP conversation from the fiscal social contract, central to which is the question of trust. When people pay their taxes, they trust that it is for the common good and the expectation is that the government will apply the resources responsibly, equitably and justifiably and that there is tangible value for taxes paid.”
The DRMS proposes interventions to enhance the stability and sustainability of the tax system, transparency in tax policy making process and improved efficiency and integrity in tax administration. This is expected to build the confidence for both new and existing businesses. But the benefits of the strategy will depend on its full and effective implementation.
As the national tax collector, URA is all too often caught in the middle between the central government and taxpayers and becomes an easy scapegoat when the issue of taxes becomes emotionally charged.
In a paper, ‘Who can make Ugandan Taxpayers more Compliant’, Doris Akol, a former URA Commissioner General and Ronald Waiswa, a URA Research and Policy Analysis, together with Milly Isingoma Nalukwago highlighted the Authority’s situation.
Published in 2020, under the auspices of the International Centre for Tax and Development, the paper points out URA can do little to increase trust in the government; that is principally a job for the government.
The authors then write that the URA can mainly make itself more trustworthy in the eyes of taxpayers by being transparent and minimizing corruption. The URA’s enforcement actions are, however, weak and limited. To a large extent, they have been undermined by the government and politicians. Enforcement has also been weak, due to internal URA factors, such as the understaffing of the enforcement team and the fact that the URA does not take enforcement action as often on small taxpayers.
In their defense of the URA, the trio state, ‘Very little has been done to build taxpayer morale. There are widespread concerns over the poor use of tax money, missing or poor government services and some sections of society being shielded from paying their share, because of their connections or roles in government. The government should give more support to URA activities, desist from protecting non-compliant taxpayers and be accountable to the public for the revenues collected’.
John Musinguzi Rujoki, the URA Commissioner General is leading an Integrity Drive aimed at transforming URA into a modern revenue collection agency. Meanwhile, USAID is going into the final year of an Activity that has been working closely with URA staff towards achieving this aim.
The best scenario for DRMS is that the willingness of Ugandans to pay taxes will increase in direct proportion to the government showcasing impactful expenditure on public goods and services. And by the way, those speedy vehicles with sirens and flashing lights during peak hours, threatening to run taxpayers off the roads, does little for tax morale.