Stop tax exemptions, IMF urges Uganda Government

25-08-2011

The International Monetary Fund has urged Uganda Government to do away with tax exemptions next financial year to maintain a steady economic growth amidst what was called "tough times" ahead.

Senior IMF Country Resident Representative, Thomas Richardson said he welcomed the effort to begin eliminating exemptions in the Financial Year 2012/13 Budget.

"The Ugandan economy is growing faster despite the many challenges but in FY 2012/13, you must avoid a tax competition or risk racing at the bottom in the East African Community," said Richardson.

Speaking at the second Uganda Revenue Authority Consultative Business Forum at Serena Hotel recently, he challenged government on exempting VAT on intermediaries such as computer software, petroleum products, inputs to hydropower projects, poultry and livestock feed and machinery and packing materials for agriculture and dairy among others.

To Mr. Richardson, VAT is a tax on final consumption and is born by the final consumer therefore exempting intermediary goods leads to loss of revenue. Every financial year government exempts certain items with a view of boosting their production and or performance.
The East African Community is among the fastest growing regions in the world since 2005 with an annual Gross Domestic Product growth of 6.4percent.

Despite growth, Uganda is currently experiencing a two digit inflation with prices of commodities rising up to close to 20percent, one of the highest in the region. This to traders is attributed majorly to the exchange rate and the increasing prices of fuel at pump stations.
But IMF insists that the global environment is highly uncertain and Uganda needs to collect more revenue to provide a buffer for future shocks and therefore has to do away with the "many exemptions" charactering the tax system.

The IMF's suggestion prompted heated reactions from some representatives of the business community, who had gathered in Kampala, for the Uganda Revenue Authority Consultative Business Forum.

"I disagree with IMF when it comes to the issue of eliminating tax cuts," said Godfrey Ssali Uganda Manufacturers Association‟s Policy Officer. "Just a simple exemption on fuel preferably petrol and diesel can turn around the economy," Ssali added.

URA Commissioner for Customs, Richard Kamajugo however said that for the last four years, URA has been collecting 820 and 530 shillings per liter from petrol and diesel respectively.

He said the August exchange rate standing at 2420.7 shillings per dollar for imports and 2410.7 for exports is the lowest in the region.

This implies therefore that that either businessmen are profit minded or other factors into play say costs of the barrel at countries of export, freight or internal costs might be responsible for the increasing pump prices.

In Financial Year 2011/12, The Minister of Finance, Maria Kiwanuka reduced local excise duty from sugar by 50% and exempted paraffin, which reductions are expected to cost Uganda 20 billion shillings in taxes.

Mr. Richardson however said that government cannot afford cutting tax on diesel or petrol because, "it will be losing a lot of revenue, yet has to generate more!" He however said the money collected in tax should be used to improve service delivery, a sector that the Minister Maria Kiwanuka highlighted as key this financial year.

Richardson urged government to scrap investment trader regimes, improve the Value Added Tax refund system and enforce the issue of transfer pricing guidelines.

A transfer price is the amount charged by one associated enterprise for a good, service or intangible property transferred /supplied to another related/associated enterprise and it can be domestic or cross border.

The second Consultative Business Forum with Chief Executives and Finance Directors from various companies and agencies was organized by URA to address a cross range of issues including transfer pricing and double tax agreements that has been introduced in the East African Community.