Without traders taxes, the economy is dead

That’s why Museveni can’t save them from URA

COVER STORY | THE INDEPENDENT | “Tax has a negative multiplier to the economy, more so in economies such as ours where the tax system is regressive and accountability is very poor. It has long been proven by economists that people’s incomes, business profitability and generally GDP and GDP growth rate decrease whenever taxes charged by governments increase.”

That is what Ramathan Ggoobi; the current Permanent Secretary/ Secretary to the Treasury, Ministry of Finance Planning and Economic Development (MoFPED) wrote in a 2016 article entitled “Museveni’s wrong obsessions”.

That article was published in the Africa Research Institute journal. At the time, Ggoobi was the head of the Makerere University Business School Economic Forum and self-declared disciple of “Economics that Works”.

Today, three years since July 2021 when he was appointed to be the top bureaucrat in the Ministry of Finance Planning and Economic Development, Ggoobi’s economics appears not to be working.

Under him, the country’s debt burden has swollen to unsustainable levels, the income gap has widened as the rich get richer and poor are poorer, the value of the shilling is at an all-time low against the dollar, corruption and fiscal indiscipline of public officials is at all-time high, and the economy has failed to get rid of the COVID-19 grogginess. These metrics make Ugandans angry and ready to protest with or without Uganda Revenue Authority’s tax maneuvers. It also could explain why traders in Kampala and some cities and towns across the country angrily closed their shops in protest starting April 16.

The traders claimed they were protesting the Uganda Revenue Authority’s enforcement of use of its Electronic Fiscal Receipting and Invoicing System (EFRIS). This system is not new as it is already being used by manufacturers and large businesses. URA is simply pushing it downtown to capture informal business activity players who largely operate outside its orbit. The result is that the informal business find EFRIS cumbersome to use and an intrusion into their private dealings.

But URA’s move downtown also reflects the extent to which Ggoobi’s views on Uganda’s tax burden have changed. He now wants to increase taxes.

Raising tax-to-GDP ratio

Recently, on April 12, Ggoobi told journalists: “Uganda has the second lowest tax burden in East Africa and one of the lowest in the world”.

Ggoobi was referring to a measure of the amount of tax paid by Ugandans as a proportion of their total income. Ggoobi and his economist friends call this the tax-to-GDP ratio at the national level.

In his April 12 statement Ggoobi added: “Uganda’s tax burden stands at 11.8%, ranking it at 140 out of 170 countries. The only country in East Africa with a lower tax burden is Tanzania at 11.7”.

That statement explains what Ggoobi now considers to be his mission at the Ministry of Finance which is simply to ensure that Uganda’s tax burden goes up. And for that mission, he has linked up with the perfect man for the job; the URA Commissioner General, John Rujooki Musinguzi.

It appears that while Ggoobi entered the Finance ministry on the high horse of implement “economics that works”, Musinguzi entered URA on the back of his background as an ICT guru.

Musinguzi gained most recognition for that 2006 attempt to frame rape charges on opposition stalwart Kizza Besigye and was a star witness in the case.

In a message posted on his social media pages, shortly after President Yoweri Museveni named Musinguzi to head URA, Besigye called the appointment a “reward”.

“I’m surprised he was not rewarded earlier basing on his service to the current regime,” Besigye wrote.

He added: “Mr Musinguzi played a key role in the patently trumped-up rape case. At the time, he worked as the Head of Audit & Finance in the Revenue Protection Services (RPS), then headed by Gen Kale Kayihura. Apparently, during the trial, he’d stepped out to work for a private IT Company. In his evidence he said that he and his family were known to President Museveni, even before he was appointed to work for RPS because they hail from the same place.
“He said that he’s the one who took Ms Kyakuwa (the alleged rape victim) to meet Mr Museveni at State House, where, as the Court heard, the case was “constructed”.

Although he was appointed in 2020, John Musinguzi is no stranger to tax enforcement. He was head of Finance and Audit of the Special Revenue Protection Services (SRPS), an irregular military unit attached to the URA in 2001 by President Yoweri Museveni and disbanded in 2006. Then Brig. Kale Kayihura headed the unit that gained notoriety for its shoot to kill policy in pursuit of smugglers and tax evaders. It was disbanded when the burden of the bad name it gave to URA became unbearable.

Musinguzi moved on to set up a private IT company, became the Senior Presidential Advisor for ICT, and had a stint as Chairman of the board of National Information Technology Authority (NITA-Uganda). His pitch was to turn URA’s floundering tax revenue generating project with a battery of ICT solutions. The troublesome EFRIS is one of those solutions.

It now appears the Musinguzi has brought back to URA the firm tax compliance mode of the Kayihura’s SRPS. That might explain why, when URA recently moved to enforce the use of EFRIS in downtown Kampala businesses, heavily armed soldiers were deployed to check that goods being moved had EFRIS receipts or else they were seized. Kayihura and Musinguzi used similar search and impound tactics during the SRPS days.

When the traders recently shut their shops in protest at the increasing militarisation of tax collection, more soldiers were deployed to compel them to open their shops. Traders who protested were roughed up and flogged by the no-nonsense soldiers.

A desperate move

In reality, the move to enforce the use of EFRIS by the informal sector is a sign of desperation by the government as all other sources of revenue appear to have reached their limit. At the same time, the government appears unable and unwilling to fix the major causes of poor tax revenue performance.

According to most experts The Independent has spoken to and through research, the main reasons of poor tax revenue performance are unrealistic tax expenditures, corruption, poor governance, low tax morale, overdependence on international trade tax revenues, and structural system weaknesses.

Following the reading of the FY 2023/24 budget speech, experts from PwC wrote a series of interesting articles around it. One of these articles was written by Crystal Kabajwara – Business Advisor, PwC Uganda, entitled “Low tax to GDP ratio reflects small tax base”.

Kabajwara says a lot has been said about Uganda’s low tax to GDP ratio which currently stands at 13.9% showing that a significant part of Uganda’s economic activity is untaxed. It says in 2021, URA statistics revealed that only one million people in Uganda were paying taxes despite the large population engaged in economic activities. So why is this?

Kabajwara points out that tax administration and enforcement cannot be the only causes because use of ICT interventions such EFRIS have improved those areas.

Kabajwara writes: “Therefore, shouldn’t we then consider other highly probable causes such as the general lack of popular support for taxation? Why is there a lack of support?

“This may be attributed to a breach of the fiscal social contract between citizens and the state. An important part of every country’s development process is the building of a social contract in which citizens pay tax and, in turn, receive public goods and services. Studies have shown that this is associated with the establishment of a culture of tax payment and a belief that non-payment is wrong.

“Therefore, we cannot separate the tax to GDP conversation from the fiscal social contract, central to which is the question of trust. When people pay their taxes, they trust that it is for the common good and the expectation is that the government will apply the resources responsibly, equitably and justifiably and that there is tangible value for taxes paid.”

To pursue responsible, equitable, and justifiable use of taxes, the government would have to adopt an all-inclusive political settlement, enforce anti-corruption measures, eliminate inefficiencies in the tax system, and formalise agricultural and informal sectors to widen the tax base. But the government appears unable and unwilling to fix them.

Surprisingly, PS Ggoobi appears aware that the strategy the government is pursuing is wrong. He wrote about it in his 2016 article entitled “Museveni’s wrong obsessions’.

In the article, Ggoobi pushes several ideas on how the government can support and grow the private as the engine for growing the economy. He criticises the government’s policies back then which are similar to what he is implementing today, including the Private Sector Development Strategy (PSDS).

Ggoobi says if the government wants the economy to grow, it must promote growth of the private sector. To do this, the government must end its structures that promote government patronage and the culture of hand-outs and shift to supporting private sector

But he says, the government’s strategy is anchored on a wrong motivation: to raise tax revenue.

Ggoobi writes: “But we understood where the guys at Finance were coming from. What do you do if your boss shows you that the main economic indicator he’s interested in is growth of tax revenue?”

Then he addresses President Museveni directly: “Mr. President, stop your tax revenue growth obsession”.

But if the Ramathan Ggoobi who is today the top bureaucrat at the Ministry of Finance and is implementing Museveni’s tax revenue growth obsession meets the Ramathan Ggoobi who wrote that article in 2016, he would order URA’s soldier enforcers to arrest him.

Ggoobi has embraced the government determination to force the introduction of the Electronic Fiscal Receipting and Invoicing System (EFRIS) to the informal sector. The question is why?

According to experts we have spoken to, the government is desperate because of three main reasons.

First is that URA already has the highest tax regime in East Africa and therefore has little leg-room for raising tax rates as is happening in neigbouring countries.

In an article published following the reading of the FY 2023/24 budget speech, Trevor Lukanga – Senior Manager, Tax, PwC Uganda pointed out how, whereas Kenya and Tanzania had leg-room to increase the rates of some taxes, Uganda could not because it was already charging the highest rates in the East African region. Uganda can only expand the tax base. That is why the focus is on catching those outside the formal sector.

Lukanga’s article was entitled, “Uganda’s tax regime is still the highest in EAC”. Lukanga mentions rates of PAYE, taxes on branches, and excise duties.

“Comparatively across the East African region, the Uganda tax regime appears high,” Lukanga writes, “Therefore, government’s decision to expand the tax base using other means other than increased tax rates seems to be a step in the right direction especially when there’s only so much left to tax and the citizenry already feel like they have been taxed to the hilt.”

According to Lukanga, the main issue for the government appears to be debt sustainability and how the government will fund its debt commitments. Uganda’s public debt has increased by 3.5 per cent, reaching $24.69 billion at the end of December 2023. Debt servicing costs now account for 32 per cent of the national budget. That means the government has limited resources to finance its activities.

That possibly explains the second reason for the Uganda government’s desperation; it has chosen to emphasise enforcement as a means to growing tax revenue as opposed to emphasising tax compliance which is pursued by other countries because compliance would require it to implement the implied social contract with the tax payer. The government does not have money for that.

That why URA defines a tax as a non-quid pro-quo compulsory payment. But there are other definitions that emphasise the tax revenues role in financing government activities, including public works and services such as roads and schools, or programs such as Social Security and health. The government possibly does not like this definition because it does not have the ability to provide the services obligated.

Without traders, economy is dead

Finally, traders are being squeezed because, unlike other countries that have a diversified tax base, Uganda relies solely on indirect taxes for its revenue. In other words, without traders paying taxes, the Uganda economy is dead.

According to revenue statistics for Africa published in 2023 by the OECD, in 2021, Uganda’s non-tax revenues amounted to 2.0% of GDP. This was lower than the average non-tax revenues for the 33 African countries (5.8% of GDP).

The highest share of tax revenues in Uganda in 2021 was contributed by taxes on goods and services other than VAT (34%). Most of these taxes on goods and services are paid by traders since they are mainly sales taxes levied on the production, extraction, sale, transfer, leasing or delivery of goods, and the rendering of services. They cover general sales taxes – whether levied at manufacture/production, wholesale or retail level, taxes levied on the import and export of goods, and taxes on the extraction, processing or production.

The second-highest share of tax revenues in 2021 was derived from value added taxes (VAT) (31%). Although the final consumer bears the burden of VAT, traders are the main facilitators of its collection. In fact, the collection of VAT is at the heart of the current battles between the traders in Kikuubo and URA.

Tax on company profits is also a major component of Uganda’s tax structure at 9%. Corporate tax is levied on net profits of business enterprises, including their capital gains of enterprises. The other major tax is personal income tax at 25%.

In contrast, other economies have other taxes that do not involve traders or businesses. In richer countries, the biggest share of government tax revenue comes from social security contributions which are negligible and not factored into Uganda’s figures. This is followed by tax on personal income and VAT in number three. All these three tax categories are not paid by traders as they are not sales tax. Taxes on goods and services other than VAT are a distant fourth together with corporate tax.