Uganda Businesses propose Higher PAYE threshold

3-April-2012

IN what will emerge as a major positive fiscal policy decision in coming years, experts have agreed that raising the Pay As You Earn (PAYE) threshold to sh250,000, from sh130,000 will cause a tax shortfall in the short-term, but will stimulate and reawaken the economy in the long-term.

The proposal said to have received the presidential nod will see the Treasury lose between sh50b-sh60b in PAYE collection as a result of pushing the threshold up.

The move implies that PAYE will only be applicable to workers earning sh250,000 and above.

The other major proposal on fiscal policy being fronted by the private sector is the reduction of Value Added Tax (VAT) from 18% to 16%.

Sources said the two landmark proposals are being discussed in the finance ministry.

The economy has been under serious strain on the back of tough macroeconomic conditions pushed to the limit by runaway inflation, a depreciating shilling and gloomy global markets.

The Private Sector Foundation Uganda (PSFU) met the President early last month to argue their case on the issues they want addressed in the coming budget.

Gideon Badagawa, the PSFU chief, explained that the PAYE proposal would boost low income earners who have been crying for salary raise.

"The whole idea is about increasing purchasing power. Teachers and nurses begin to earn more and consume more, thus creating the need to expand the production sectors," said Badagawa.

"Industries begin to expand. The impact on taxes is short term, but it will stimulate the economy. This is the beauty of planning; you swallow the bitter pill now, but you gain later."

Badagawa estimates that after six months when people have been left with more money to spend, the economy will expand as new production lines emerge following increased demand.

Yet if the Government were to succumb to the pressure to raise salaries, even a small 5% increase in salaries for teachers would further hurt the already stretched Treasury.

The biggest challenge is that public resources are put more to public sector management rather than productive sectors like agriculture.

"We need to scale back expenditure in the short term because of this expected shortfall (on revenue). If we are planning to create a new district, can we hold on?" one analyst advised.

On whether reducing PAYE threshold and cutting down on VAT would mean the finance ministry would set new targets, Keith Muhakanizi, the deputy secretary to the treasury, said it was a policy issue and the ministry would come out with a position.

Paul Kyeyune, the Uganda Revenue Authority (URA) corporate affairs manager, said PAYE collections are limited because people get paid monthly.

"VAT fluctuates depending on the consumption patterns. If the consumption is low, VAT collections drop, if the consumption rises, VAT collections rise," said Kyeyune.

For example, the spill over impact of increased beer consumption for the 2011 festive season resulted in a surplus of sh2.67b in VAT and local excise duty for beer alone in February.

Regional perspective

Kenya PAYE threshold is at $130, Tanzania' is at $85 and Uganda at $50.

The implication of the low PAYE threshold is that given that the East African Common Market is in place, Ugandan workers will find it more attractive to work in Tanzania and Kenya, thus hurting Uganda's industrial base.

"Ugandan workers will move and you will find many of them in Kisumu, while employers will get discouraged," Badagawa said.

For VAT, Uganda charges 18%, while its biggest trading partner Kenya charges 16%. Industrialists consider this not strategic considering that Kenya has a more competitive advantage being closer to the sea, which means inputs are cheaper to transport compared to hinterlands states like Uganda.

"In addition, they are enjoying a 2% point advantage on VAT," said a member of the Uganda Manufacturers Association (UMA) who fully supports the proposal to reduce VAT.

Burundi, Tanzania and Rwanda all charge 18% for VAT. By the end of last week, the private sector was preparing to present another memorandum to the President on expediting the EAC harmonisation of process and policies like taxation.

Impact

Despite the anticipated reawakening of the industrial sector and stimulation of the economy, a reduction of VAT will impact directly on some sectors.

The telecom industry has for instance lobbied for years for the scrapping of VAT on handsets.

Thus while the Government has rejected the proposal claiming a mobile phone is a matter of choice, the reduction will boost uptake and mobile phone penetration.

Growth in mobile phone penetration has a direct impact on GDP growth. Therefore, experts believe that the fear of the proposals negatively affecting the country's tax base is a short term matter.

The long term ramifications will be more beneficial to the economy.

By David Mugabe: The New Vision Newspaper