Uganda Revenue Authority leading change in the economy by changing Tax Collection Tactics

Monday August 22, 2011

THE Uganda Revenue Authority (URA) has lurched onto a new way to collect income tax. Starting June, URA took advantage of property transactions – cars, land and buildings - to collect income tax.

How it works is when paying stamp duty to effect the transfer of property, URA will check whether you are tax compliant. If not, they will deem the money you paid for the property as undeclared income and will slap a 30% tax on it. This is for transactions over sh50m.

It is estimated that up to 70% of the Ugandan economy is in the informal sector, meaning a lot of transactions are done under the radar, mostly using cash, whose source is hard to pin down.

To secure this money as solid assets, money makers buy land and houses, which explains Kampala’s property boom of recent years.

Personally, I think this initiative is long overdue. URA’s over reliance on international trade to meet its targets was not going to be sustainable in the long run. Of course the tax body is one of the major beneficiaries of a depreciating shilling, but that is a short sighted approach to taxes.

In order to become a middle-income country by 2020, we must widen our tax base and rely more on income tax than import duties.

One benefit of taxation that is rarely discussed is its impact on a nation’s productivity. Fortunately, we have recent history to call on.

In 2006, the Government scrapped graduated tax. The argument was that it was too expensive to collect and that regressive won the day. It also helped that it was an election year, when political expediency comes up against economic good sense. The former often wins the day, to the long term detriment of nations. Ask the US.

Five years down the line, the fall out is a reduction of productivity, as villagers feel no compulsion to produce more than they eat and city youth have no incentive to work. They resort to stone throwing as a welcome past time.

We forget why graduated tax was introduced. In order to get us to grow cash crops for British industry, the colonial government introduced poll tax, payable by every able bodied man.

The only way to get the men to pay the tax was to grow coffee, cotton or tea. That is how we became a big coffee and cotton growing nation. Do not believe that our forefathers grew these crops out of the goodness of their hearts. Arguably, we are unproductive because we are not taxed enough.

I know URA is going to come under a lot of heat from the urban elite to drop this initiative, and I will be impressed if the tax authority gets any overt political backing. But they are just scratching the surface in potential collections they can extract from the people.

For example, we have a few landed families wallowing in poverty despite the square miles of land that have been passed down the generations.

The land, which is encumbered by unlawful occupants, is a dead weight on both parties for the simple reason that neither can unlock the full potential of the land’s value.

In West economies, all landowners are taxed. The net effect of this is that as a land owner, you need to make a choice. Does it make financial sense to hold on to the land or not. If it does not, you sell it off to someone who can put it to productive use and pay the tax.

With this single move, the supply of land in the market will increase, lowering prices and increasing national productivity – since all land will be productive or at least more than is now.

And what will happen to the now landless masses? With their “new found wealth” they can go and rent land or housing, either way, there will be more incentive to work.

This move will be even more politically explosive than what URA is currently implementing. But if we are serious about graduating into a first world country, these tough decisions have to be made yesterday.

As a country, we are poor not for lack of resources but because we do not put our resources to optimal use.

URA can help us with this by taxing everything that can be taxed, and when history is written, the URA like the IRS in America, will go down as having been a major driver of Uganda’s future prosperity.

By paul busharizi: The New Vision News Paper