In the financial year 2022/23, the government provided tax exemptions amounting to a significant Sh. 2.97 trillion, according to a report by the Ministry of Finance. This substantial figure represents 12.5% of the total tax revenue collected during that period and accounts for 1.62% of the nation’s Gross Domestic Product (GDP).
“For FY2022/23, the value of foregone revenue due to tax expenditures is estimated to stand at UShs2,972 bn, or 1.62% of GDP. The total amount of tax collected during 2022/23 is UShs23,733 bn, meaning that the value of revenue foregone due to tax expenditures is equal to around 12.5% of total tax collections,” the Ministry’s report released on Friday reads in part.
These tax exemptions have a significant impact on the country’s overall financial landscape.
Government of Uganda spends through the tax system in the form of tax exemptions, rate reliefs, allowances, deferrals, and credits in addition to public expenditure as presented in the National Budget.
The value of revenue that is not collected due to these relief measures is referred to as ‘Tax Expenditure.’ This is measured by comparing the actual revenue forgone with the revenue that would have been collected under a standard or ‘benchmark’ tax system.
In Uganda, Tax Expenditures are implemented for various reasons. These include encouraging investment, promoting local manufacturing, creating jobs, achieving social objectives, and addressing the challenges of collecting revenue from sectors that are difficult to tax.
These fiscal policy decisions by the government to exempt certain taxes play a crucial role in shaping the country’s revenue collection. They also significantly influence economic growth, as the exemptions directly affect the government’s ability to generate revenue.
The Ministry of Finance report indicates that the estimated cost of VAT expenditures during the fiscal year 2022/23 amounted to Sh 992.2 billion. This figure represents approximately 0.54% of the country’s Gross Domestic Product (GDP) and constitutes 33.3% of the total revenue lost due to tax expenditures in Uganda.
“Revenue foregone under the VAT has increased from UShs628bn in FY18/19 to UShs992.2bn in FY22/23.”
This represents an increase of 58%.
“As a percent of GDP, the figure has increased from 0.48% to 0.54% in the same time period, a proportional increase of just 13%. Notably, however, revenue foregone under the VAT has fallen from FY21/22 to FY22/23, by 0.06 percentage points,” the report reads.
The primary source of foregone revenue under the VAT comes from allowances, namely deemed VAT, which accounts for 75% of revenue foregone under VAT in the most recent financial year.
Meanwhile, revenue lost due to tax expenditures under Corporate Income Tax (CIT) has surged significantly, rising from Shs168.5 billion in the fiscal year 2018/19 to Shs350.62 billion in FY2022/23. This represents a substantial increase of 108%.
In terms of GDP percentage, the revenue forgone has risen from 0.13% to 0.19% during this period, reflecting a 46% increase.
“A large increase was seen in the most recent fiscal year, due to the rate relief on payments for the supply of technical and other services provided directly and exclusively for the EACOP project. It should be noted that it was not possible to (fully) estimate revenue foregone on a number of key provisions, such as DTAs or some strategic investor exemptions.”
On matters tax expenditures related to customs duty, the East African Community (EAC) operates under a unified legal framework, specifically the East African Community Customs Management Act (EACCMA). This law governs the customs activities of all member states, including Burundi, the Democratic Republic of the Congo, Kenya, Rwanda, South Sudan, Tanzania, and Uganda.
The EAC member states have established a harmonized trade policy through the implementation of the Common External Tariff (CET) and import quotas for goods entering the region from non-member, third-party countries. This common approach to external trade ensures that the same tariff rates and import regulations are applied across all EAC countries when dealing with external partners.
As a result, the EAC operates as a single customs territory for its member states. Within this territory, duties and most restrictive trade regulations are eliminated for trade among the member states. This creates a more integrated regional market by facilitating the free movement of goods across borders within the EAC, promoting regional trade, and reducing the barriers that would otherwise hinder economic integration and growth among the participating nations.
“Total revenue foregone under customs duty has increase from UShs560bn in FY18/19 to UShs794bn in FY22/23. This represents an increase of 42% in nominal terms,” the report reads.
“As a percentage of GDP, however, revenue foregone under customs has risen only modestly over the same period, from 0.42% to 0.43%. Compared to the previous financial year (2021/22), revenue foregone has decreased by 0.03% of GDP (although increased in nominal terms from UShs747bn to UShs794bn). The majority of revenue foregone under customs duty (93% in FY22/23) is from rate reliefs offered via the Stay of Application and Duty Remission schemes.”
Tax exemptions can have both positive and negative impacts on the economy.
On the positive side, tax exemptions are often used as tools to encourage investment, stimulate economic activity, and promote the development of key sectors. By reducing the tax burden on businesses, particularly in industries like manufacturing, agriculture, or technology, governments can attract both domestic and foreign investment. This can lead to job creation, increased production, and overall economic growth.
For instance, tax holidays for new businesses or tax relief for investments in infrastructure can incentivize long-term capital investments that benefit the economy.
However, tax exemptions also come with significant costs. They reduce the government’s revenue, limiting its ability to fund essential public services like healthcare, education, and infrastructure. This can lead to budget deficits and force the government to borrow, increasing national debt.
Additionally, if not well-targeted, tax exemptions can create imbalances, favoring certain sectors or companies over others and distorting competition.
Exemptions often times benefit wealthy individuals or large corporations more than the broader population, exacerbating income inequality.
