Paying more to avoid a tax

What reactions to social media tax reveals about attitudes

Kampala, Uganda | RONALD MUSOKE | Frank Tumwebaze, the Minister of ICT and National Guidance is puzzled by the current resistance to the social media tax which his government recently introduced.

“Why don’t you want to contribute to your economy?” says Minister Tumwebaze, “Ask yourself how much you are spending on data for you to download VPN to enable you bypass capacity. If you are really a committed Ugandan and want services from your government, why are you motivated to contribute money 30 times higher than the OTT tax to the innovator of the VPN?”

Tumwebaze was on July 17 reacting to the evasion with which most Ugandans have reacted to a Shs200 (approx. 5 U.S. cents) daily tax on the use of social media platforms like Facebook, WhatsApp, Twitter, Viber, and LinkedIn.

The government also imposed a 1% levy on mobile money deposits and withdrawals. Although this attracted fewer furors, President Yoweri Museveni ordered the tax rate down to 0.5% and only on mobile money withdrawals.

The government expects to collect between Shs 400bn and Shs 1.4bn every year from the social media tax according to finance minister’s 2018/19 budget speech of June 14.

But many Ugandans are resisting the new tax and some have resorted to using the Virtual Private Network (VPN) which remains out of reach of the government. Many of those opposed claim the tax is double taxation that also infringes on their lifestyles.

Supporters of OTT tax say it is an opportunity for the government to raise money internally and avoid borrowing and reliance on donor aid.

“We have a budget of Shs 33 trillion and we are only collecting Shs 16 trillion – the rest we borrow,” says Lawrence Bategeka, an economist and MP for Hoima Municipality, adding that new taxes are needed if the country is to develop.

Compared to other EAC countries, Uganda’s tax to GDP ratio is one of the lowest at around 14%; Kenya’s stood at 20%, Rwanda’s at 14.7%, and Tanzania’s at 21.0% as per 2013/14 figures.

Bategeka says Ugandans have a bad attitude to paying taxes.

“We have a culture of not wanting to pay taxes and (yet) the same people want to live a good life,” he says, “If Ugandans don’t want to pay taxes, then we need to have a discussion and find an alternative, and in this case, that alternative is to downgrade our ambitions as a country.”

But Albert Mucunguzi, the chairperson of the ICT Association of Uganda says Ugandans do not have poor attitude to paying taxes. Rather, they rushed to install VPNs as a form of protest and to make a point to the government.

Days before the government introduced the social media tax, the Makerere Institute of Social Research (MISR) weighed in on the debate with a panel discussion on: “Tax Fairness: How do government’s new tax measures advance tax fairness?”

Dr. Grace-Edward Galabuzi, a senior research fellow at the institute argued that tax fairness is one of the attributes of a good policy because it plays a good role in tax reporting behaviour.

“If a tax system is perceived to be unfair or inequitable, it can breed tax evasion and turn out less successful and illegitimate,” he said, “Tax payers who are not satisfied with the treatment from the tax authorities and also from the government in terms of return on taxes may seek ways of evading those taxes.”

“Levying taxes on social media for instance may represent a real revenue boon, but is it fair or is it seen to be fair? Are there alternatives that may be better sources of revenue that the government desperately needs?”

Dr. Galabuzi said if tax payers are given voice and allowed to contribute to the process of decision making, it would suggest tax payers are valued and respected by the authorities and the government.

At the same discourse, Dr. Fred Muhumuza, a development economist said a tax regime begins to be unfair if the government brings taxes that are not pegged on the logic of fairness but only inclined on one argument of revenue collection.

But for many others, like Adventino Bajwa, a graduate student at the Makerere Institute of Social Research (MISR) in Kampala, the issue is clear; taxation should go hand in hand with the state’s role of providing public goods such as good quality education, health and security.

Bajwa says currently, while the government has privatized many of these public goods, it continues to demand taxes. He says that is unfair.

“At a time when former public goods are going private full scale and we are yet to pay for roads in Uganda, it is perplexing that the debate around taxation proceeds as though the state has not changed a single bit since the colonial days.

“More than ever before in our history, the most urgent debate today is not on whether taxes are fair or not but whether there is still need to pay taxes,” he says.

Bajwa’s views may be more extreme than most and he may have spoken before the recent taxes, yet his insistence on a link between the low government service delivery and the attitudes of Ugandans to being taxed, and their low compliance rates is widely shared.

Julius Kapwepwe, the director for programmes at the Uganda Debt Network says at this moment in time “Ugandans cannot afford to have a state whose role is to cross its legs on the other side, watch citizens suffer day and night to earn an income and then simply come to pick taxes”.

“It is high time the state made its fair share of investment upon which it earns its own income and then it can ask the rest of us to make a contribution.”

Their views fit in with the findings of a recent study on taxation in Uganda by the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI) that Uganda lacks such fiscal contract between the people and the government. The researchers concluded that as a result, tax morale is either non-existent or very low.

Instead, the researchers said, high levels of corruption and mismanagement of tax revenues, uncertainty and a lack of communication about the use of tax revenues, and poor delivery of public services, contribute to citizens’ unwillingness to pay taxes.

A 2013 Afrobarometer paper titled, `To Pay or not to Pay? Citizens’ Attitudes towards taxation in Kenya, Tanzania, Uganda and South Africa’ also noted that tax compliance attitude is positively correlated with the provision of public services in the four countries.

The researchers said attempts to broaden the tax base should build on insights into how citizens experience and perceive the tax administration and enforcement, and whether and how their tax behaviour is correlated with their perceptions.

The researchers noted that tax compliance is influenced by the extent to which citizens trust their government. The researchers defined legitimacy as “belief or trust in the authorities, institutions and social arrangements to be appropriate, just, and work for the common good.”

The link between tax compliance attitude and public service provision depends on the specific service in question. For instance, while access to infrastructure such as roads and electricity encourage tax compliant attitude in Kenya, respondents in Tanzania and Uganda refer to education and health services as key to their tax compliance.

A 2013 OECD policy paper on tax and development also notes that citizens are more likely to perceive tax obligations more favourably when their government is seen to be acting in a trustworthy manner.

“A government seen to be making good use of tax revenue is associated with higher levels of trust and tax morale,” the OECD paper states in part, “Tax morale is at the heart of state building and the citizen-state relationship.”

Minister Tumwebaze also sees the link between taxes and the services from the government. But he insists Ugandans should pay the tax first if they want to demand services from the government.

As the debate rages, however, some officials say the government’s next move will be to block the VPN.

Godfrey Mutabazi, the executive director of the Uganda Communications Commission (UCC) which regulates social media says the government already has the required software. Mutabazi adds that individuals who circumvented the Over the Top (OTT) services tax system could also be penalized with surcharges. To this camp, it appears, better tax compliance enforcement and not attitude change is required.