Uganda goes all out to widen tax base as budget deficit bites

A quick look at Uganda’s 2018/19 financial year budget has experts pointing to the deepening of the tax burden on a few taxpayers rather than a widening of the tax base.

While President Yoweri Museveni has come out to criticise social media and express the urge to curtail what he calls rumour mongering, experts say the government’s biggest motivation to introduce harsh tax measures against the telecommunications sector is largely pragmatic.

Kenneth Mugambe, the director of budget says government has been trying to reduce its debt financing obligations, by reducing domestic borrowing.

For the 2018/19 financial year government will borrow Ush940 billion ($253 million), slightly lower than the Ush955.2 billion ($257) borrowed last year.

The biggest challenge, however, has been the government’s inability to retire mature domestic debt that is routinely kicked forward. As a result, Uganda will spend 30 per cent of the country’s Ush30.9 trillion ($8.3 billion) on debt refinancing and payment.

In addition to growing debt financing demands, the government has been increasing the civil service salaries.

With most civil servants earning less than the average market rate for their education level, the number of strikes have been increasing.

Last year medical workers went on strike, and the promise of more unrest in the civil service has prompted the government to promise to increase its wage bill by Ush1.8 trillion ($484.7 million). For 2017/18 financial year, the wage bill was Ush3.6 trillion ($963 million).

With these challenges in mind, State Minister for Finance David Bahati presented to parliament a proposed law that will hit the telecommunications sector with its highest tax bill yet.

In a move that is expected to hit gains in financial inclusion occasioned by the arrival of mobile money, government has increased excise duty on mobile money charges from 10 per cent to 15 per cent.

“The increase in mobile charges was a painful one because it affects financial inclusiveness but government needs money,” says an official at the Uganda Revenue Authority (URA) who requested anonymity. 

Double taxation concerns

The official also says that the telecommunications companies have promised to push the tax to the customer, just like they did in the 2013/14 financial year, when the 10 per cent excise duty charge was introduced on the service.

A mobile money customer will also have to bear another excise duty charge of 1 per cent of the transaction value of the money deposited on their phones.

With exception of calls from Kenya, Rwanda and the Republic of South Sudan, incoming calls into Uganda will pay $0.009 per minute in excise duty.

The tax on provision of call services has also been reorganised to target airtime and not the calling service. Anyone purchasing airtime will now be expected to pay 12 per cent in excise duty in addition to the 18 per cent value added tax (VAT).

Airtime commissions will also attract 10 per cent withholding tax, while an individual social media user could pay up to a total of Ush73,000 ($20) annually arising from a daily Ush200 ($0.027) charge.

However, concerns have been raised over double taxation since mobile data users purchase data bundles off airtime. It is also not clear how government will isolate data for social media from that for Internet searches.

According to the Excise Duty Bill 2018, a telco service operator providing data used for accessing over the top services is liable to account for and pay excise duty on these services.

With the responsibility to collect this tax placed in the hands of telcos, an expert has told The EastAfrican the tax on social media will most likely be charged off airtime. Government has in a raft of separate regulations asked telcos to stop the use of airtime scratch cards to aid user tracking.

Other reforms include the requirement that all registered tax payers file returns. This targets people in the formal sector, but do not pay taxes on side businesses and rental incomes.

Other targeted sources

The Bill also targets taxes from powders to make juice which will be charged 15 per cent of their value in excise duty.  

An individual making payment for agricultural supplies worth more than Ush1 million ($269.3) will be required to pay withholding tax.

Opaque beers, which are processed drinks largely made from local raw materials like millet floor, sorghum and cassava will also be required 30 per cent or Ush230 ($6 cents) per litre  in excise duty.

According to officials in the Ministry of Finance the agricultural sector has not been contributing enough to the country’s revenue and the new taxes are government’s way of changing the status quo.

Moses Kaggwa the director Economic Affairs at the Ministry says Uganda will miss the 2017/18 financial year’s tax revenue collection target by over Ush600 billion ($161.6 million) even as the economy grows at a faster rate than had been expected.

He says the economic growth’s failure to reflect in tax collection can be explained by the agricultural sector’s recovery. In June last year, the Minister of Finance had projected the economy to grow at five per cent.

Mr Kaggwa says projected economic growth for the 2017/18 financial year is now 6.3 per cent. This is on account of the agricultural sector.