Uganda’s tax exemptions: a catalyst for growth or financial burden?

by Business Times writer
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Tax exemptions are a common fiscal tool used by governments worldwide to stimulate economic activity, attract investment, and boost key sectors especially those that drive the economy.

In Uganda, this approach is integral to the government’s strategy to boost key industries such as manufacturing, agriculture, technology, value addition among others.

However, while the potential benefits are clear, the actual outcomes are mixed.

The Auditor General, John Muwanga’s report for the period ending June 2023 provides a critical insight into the effectiveness and consequences of these tax incentives.

In the financial year 2022/23, Uganda granted substantial tax exemptions totaling approximately Shs1.417 trillion to 36 companies. However, 22 of the 36 companies were not fully meeting the expected employment targets for Ugandan nationals.

The Auditor General’s report reads that out of the Shs1.417 trillion, Parliament was responsible for granting tax waivers worth Shs1.293 trillion, the Ministry of Finance waived another Shs118.5 billion, while the Uganda Revenue Authority (URA) Commissioner General, John Musinguzi Rujoki granted additional tax exemptions worth Shs5.6 billion.

“The amount of taxes exempted are revenues that are foregone resulting into revenue loss on the side of government,” the Auditor General’s report reads in part.

An analysis of the memoranda of understanding for various beneficiaries showed that many companies did not meet the expected outputs, and several incentives went unused. This outcome was contrary to the government’s intentions when granting these tax incentives.

The government mandates that companies benefiting from tax incentives must ensure that more than 50 percent of their workforce comprises Ugandan nationals. These tax waivers are granted with the expectation that the resulting financial relief (reduction in operating costs), will enable companies to hire additional staff, with the majority being Ugandans, enhance export potential, attract foreign investment among others.

However, there is growing public scrutiny and debate regarding the effectiveness and fairness of these tax breaks.

Many Ugandans have raised concerns about the significance of these incentives, highlighting instances where they are irregularly granted to companies that may not deserve them.

One of the instances that have caused public uproar is the extension of tax break to Bujagali Energy Limited.

Parliament on May 7, 2024 passed the Income Tax Amendment Bill 2024, further extending Bujagali Energy Limited tax waiver for another year up to June 30, 2025.

In June 2023, President Museveni refused to assent to the Income Tax Amendment Bill (2023), and rather returned it to Parliament for reconsideration.

According to Museveni, the Bill required a new clause to be incorporated in order to provide an income tax waiver on Bujagali hydroelectric power plant for a period of one year.

This isn’t the first time Bujagali has received tax exemptions.

In May 2022, government proposed an amendment to Section 21 of the Income Tax Act to Parliament. The amendment aimed to extend Bujagali’s income tax exemption for an additional five years, from July 1, 2022, to June 30, 2027.

However, Parliament rejected this five-year extension and instead agreed to grant a one-year exemption until 2023.

Bujagali has previously benefited from a total of 15 years of tax holidays, and government is continuously extending the waiver.

Butambala county lawmaker, Muwanga Kivumbi said, “we (the country) have lost trillions of money.”

Kivumbi said that since Bujagali sells power to Government of Uganda, the thinking of lawmakers to grant it tax exemptions in the past was that, if it was taxed, the tariff would shoot up.

“Our view [now] is, for how long should we continue to loose this amount of money. We investigated Bujagali, I was part of the committee that investigated Bujagali, and found out that we have lost trillions of shillings of money, and Bujagali should begin to pay,” he said.

Although Parliament extended Bujagali Energy Limited’s tax waiver for another year, there is its own report revealing that Bujagali owes Ugandans $342,198,189 (Shs1.3 trillion) it received in excess power tariffs it charged Ugandans, through fictitious tariffs computation methods Parliament claimed the company used.

The Leader of Opposition in Parliament, Joel Ssenyonyi told the House that the issue of tax waivers is become a huge problem for the country.

“The reason we are insisting on this question of the exemptions and the waivers, the Auditor General’s report is a bit worrying because if we are exempting to a tune of 1.417 trillion, ideally the backing is that when you exempt, as long as it feeds into the economy, creation of jobs, that is normally the explanation given, but these are people we are giving free land and all these other incentives, and then there is waivers to the tune of 1.417 trillion shillings. In the meantime, we are now going after the ordinary folks, increasing tax on fuel and all these different things; there is a problem when we don’t balance these things up,” he said.

The Auditor General’s report reads that the revenue lost due to government incentives and the expenses incurred in paying taxes for exempt entities might not be comparable to the minimal advantages gained, as other obstacles are affecting the performance of the firms receiving these benefits.

“Therefore, government should explore the option of putting more effort in alternative measures that make it conducive to undertake business, such as subsidised electricity, easy access to land, ensuring affordable and reliable supply of raw materials among other things that have the potential to attract business and industrialisation without having an enormous cost related to individual businesses,” the report reads.

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