World Bank urges Uganda to improve taxation to finance development, sustain growth

KAMPALA, May 16 (Xinhua) — The World Bank in its new report has urged Uganda to improve its tax revenue if the east African country is to sustain economic growth.

The Bank in its 11th Uganda Economic Update issued on Tuesday said while the economic growth has rebounded from 4.5 percent to 5.5 percent this financial year 2017/2018, tax collections currently account for 14 percent of the country’s gross domestic product (GDP), lower than regional peers, and short of the government’s target of 16 percent.

The global financial institution said this low tax collection hinders the country’s capacity to finance investments in infrastructure and deliver essential services.

The report said while borrowing from local financial markets and overseas development assistance are important sources of development financing, they are declining steadily and often not sufficient.

The Bank said tax avoidance and evasion, partly resulting from generous tax exemptions to investors, weak tax administration, and a large informal sector (now at 80 percent), pose challenges to increasing revenues.

Figures in the report show that 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. Value Addition Tax collections amount to 4 percent of GDP, but would rise to 6 percent if there were no exemptions.

The report suggested that the country could widen its tax base by tapping into areas that are outside the tax net, applying tax instruments correctly and fairly, improving efficiency, transparency and accountability in tax administration, and delivering better public services.

“Making more people and firms pay their taxes rests on improving delivery of public services, and requires government to close loopholes and stop doling out discretionary tax exemptions. Citizens are more likely to pay tax if they see public services improve,” said Christina Malmberg Calvo, World Bank Country Manager for Uganda.

The Bank said raising awareness of citizen tax obligations and tax spending would lead to greater accountability and improve tax compliance.

“Tax is an important source of domestic revenue for a government, and central to spurring growth and opportunity for Uganda to attain its development goals,” said Rachel Sebudde, World Bank senior economist and lead author of the economic update.

“Without it, citizens would not be able to have good roads, or access to quality and affordable health care and education.”

According to the economic update, Uganda could raise up to 23 percent of GDP annually if it undertakes tax reforms to reduce leakages, expands the tax base by tapping into hard-to-reach economic activities, and improve efficiency of its revenue administration systems.

“If everyone played their part, total collections would rise dramatically and the country would be able to meet a larger part of its spending obligations, currently met through borrowing,” Sebudde said.

Keith Muhakanizi, Secretary to the Treasury said that Uganda has realized the need to raise more domestic revenue through taxes.

“Everyone in Uganda should pay the required tax if the country is to make progress in increasing domestic revenue mobilization,” said Muhakanizi, who is also the permanent secretary of Uganda’s ministry of finance.

He noted that the country should have a tax regime where politicians and high ranking government officials pay more taxes than the low income earners.

David Bahati, minister of state for finance in charge of planning, said the government is designing a framework paper for increasing domestic revenue collection.

“In the next three years, we expect to be collecting 18 percent tax to GDP,” Bahati said.