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Uganda Shifts to Modern Digital Technologies to Increase Tax Compliance

Uganda is set to increase the use of technology tools, data sources and analytics to increase tax compliance, Chimp Corps report.

Finance Minister Matia Kasaija said days of tax avoidance and evasion are soon coming to an end as government moves to roll out use of digital tax stamps and expand the range of products covered in order to deter under-declaration of production and importation.

He said digital stamps will ensure that goods on the market meet the required health and safety standards; and widen the scope of the income tax withholding agents across all sectors in order to broaden the tax base.

Delivering the budget speech this Thursday at Parliament, Kasaija new measures would enhance rental income tax collection and compliance by implementing a digital collection solution, as well as gazette rental income tax chargeable in different geographical areas for taxpayers who do not voluntarily declare their rental income.

Experts attribute low tax collection in Uganda to tax avoidance and evasion, partly resulting from generous tax exemptions to investors; inadequate administrative capacity; the presence of a large informal sector; weak checks and balances and the lack of social norms for tax compliance.

A 2018 World Bank report showed Uganda could raise more domestic revenues to support its development.

Uganda’s tax system is one of the most modern in the region, but revenue collections, at 14.3 percent of GDP, are low, and way below its tax potential.

Up to 5 percent of GDP is lost annually in tax leakages. Personal income tax contributes roughly 18 percent of GDP compared to up to 40 percent in developed countries.

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Speaking today, President Museveni attributed low revenue collections to corruption at Uganda Revenue Authority where senior officials were recently sacked.

“We are paying a lot of money in interest because we are borrowing. This can be stopped if we pay taxes. There is a lot of collusion and people not paying taxes. This is corruption,” said Museveni.

“The rentals; this is cheating. Someone has over 40 units and he is claiming that he is building new ones. We are saying that pay tax for the houses. That is why we have very low tax collection,” he added.

Kasaija said government would Gazette VAT withholding agents with an applicable VAT rate of 6 percent, and provide for penalties for failure to withhold; and also roll out the use of Electronic Fiscal Devices (EFDs), which are – cash registers interconnected to the Uganda Revenue Authority, to improve record keeping and tax compliance.

“The domestic revenue measures for next financial year are anchored on the Domestic Revenue Mobilization Strategy (DRMS), which aims to mobilise sufficient revenue to support infrastructure development and social welfare. The Strategy balances competing challenges of increasing the revenue effort to support expenditure needs, while at the same time facilitating investment and industrialisation,” said Kasaija.

The Strategy seeks to enhance revenue collection to finance the larger part of our Budget in the short, medium and long term and to create a tax system that is fair and transparent.

In view of the recent emergencies including floods, locust invasion and COVID-19, Kasaija said Government introduced modest adjustments in some taxes to raise revenue.

“This will support enhanced economic recovery, as well as maintain an acceptable level of social welfare. Tax administration will be strengthened to improve efficiency in revenue collection. The capacity of local governments, including the roll out of the digital collection of fees and rates, will also be enhanced to improve local revenue generation,” said the Minister.

Targets

Next financial year’s revenue target is Shs 21,810 billion, comprised of tax revenue amounting to Shs 20,219 billion and non-tax revenue of Shs 1,591 billion. This target translates into a revenue effort of 14.3 percent of GDP.

To achieve this target, adjustments to tax rates have been made include the excise duty rate on fuel.

He said more adjustments were made to improve competitiveness in the region, support compliance, remove ambiguities in the legislations as well as close loopholes that may lead to revenue leakage.

In order to promote import substitution and the development of local industries, government has increased import duties on goods that are produced or can be produced locally. The import duty on agricultural products has been increased to 60 percent and other products to 35 percent.

Until recently, government has been importing refined industrial sugar yet Uganda is a surplus producer of sugar.

“We have agreed with sugar manufacturers to produce refined industrial sugar locally and we shall protect them from imports,” said Kasaija.

The Minister also spoke about supporting agriculture, saying VAT on the supply of agricultural equipment will be exempted.

The supply of processed milk will also be VAT exempt to enhance the price competitiveness of milk produced in Uganda.

“In order to respond effectively to the COVID-19 pandemic, taxes on supplies for diagnosis, prevention, treatment, and management of the epidemics, pandemics and health hazards, will be exempt from customs duties,” said Kasaija.

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