Adopt a progressive tax regime to promote tax equity in Uganda

COMMENTS | Oscord Mark Otile | The recent remarks made by the Permanent Secretary and Secretary to the Treasury, suggesting that Uganda’s tax burden is among the lowest in the region, merits a critical examination. While the statement may hold some statistical truth, it does not accurately reflect the lived realities of many Ugandans. In consideration with the tax to GDP parameters, one would assume that the tax impact is distributed across all eligible tax payers. Uganda’s GDP, used as the basis for calculating tax-to-GDP ratios, often paints an overly rosy picture of the economy. Moreover, the reliance on indirect taxes as the primary source of revenue further distorts the equity of the tax system, placing an undue burden on the poor.

Indirect taxes form the largest portion of Uganda’s tax revenue, with VAT being the most significant contributor. While this model may be effective in generating short-term revenue, it exacerbates inequality. The poor, who spend most of their income on consumption, bear the brunt of these taxes. Every time a Ugandan buys essentials such as, sugar, salt, soap, clothes, or other household items, or pays for electricity or water, they are taxed indirectly, with the burden falling disproportionately on those who can least afford it.

The reliance on indirect taxes also stifles consumption, as people are forced to spend more on tax-inflated goods and services. This reduces disposable income, discourages savings, and ultimately slows down economic growth. Instead of burdening the lower- income population with these regressive taxes, the government should explore more progressive options that tax individuals and businesses based on their ability to pay.

Uganda’s tax system is less progressive compared to other countries in the East African region. A good example is Rwanda, which has recently lowered its capital gains tax and increased thresholds for Pay As You Earn (PAYE) as well as its Corporate Income Tax (CIT).

In Uganda, capital gains tax (CGT) remains relatively high (30% for companies and up to 40% for individuals), which disincentivizes investment. High taxes on capital gains reduce investor confidence and limit the growth potential of industries that could spur job creation. A more balanced approach, such as the one taken by Rwanda, would encourage both domestic and foreign investment.

Similarly, Uganda’s PAYE system places a considerable burden on middle-income earners. The thresholds for PAYE are not adjusted frequently to reflect inflation or the rising cost of living, meaning that more Ugandans find themselves in higher tax brackets despite their real purchasing power not increasing. The PAYE threshold in Uganda was

last adjusted in the fiscal year 2012/13 when the exchange rate was 1 US dollar to UGX 2,500. Today, the exchange rate has increased by 45% to an average of 3,800 shillings for 1US dollar. Countries like Kenya and Tanzania have adjusted their PAYE thresholds to ease the tax burden on their citizens, and Uganda should follow suit.

Corporate Income Tax (CIT) in Uganda also remains relatively high compared to regional peers. While Uganda taxes corporations at a standard rate of 30%, Rwanda for instance has opted for more competitive rates. Rwanda has also lowered its CIT from 30% to 28% with an eventual target of 20% in the medium term to position themselves as a preferred African investment destination. This disparity makes Uganda less attractive for businesses and investors, who may choose to operate in countries with more favorable tax regimes. Lowering CIT rates would not only make Uganda more competitive but would also lead to increased investment, job creation, and ultimately higher tax revenues in the long run.

To be fairer and just, the government must adopt a more progressive tax regime that reduces the burden on low-income earners and encourages savings and investment. This could include lowering CGT, adjusting PAYE thresholds to reflect inflation, and reducing the CIT rate to align with regional peers.

Progressive taxation, where individuals and businesses are taxed based on their ability to pay, is the most equitable solution for Uganda. It would ensure that the wealthiest contribute their fair share while providing relief to those who are struggling to make ends meet. By adopting a tax system that promotes equity and economic growth, Uganda can build a more inclusive and prosperous future for all its citizens.

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Oscord Mark Otile is a Research Officer at ACODE and also a member of the Tax Justice Alliance Uganda.