Increase agriculture revenue to boost tax contribution to GDP

Feb 12, 2015

While the members of the Board of Directors of Uganda Revenue Authority were appearing before the Committee on Commissions, Statutory Authorities and State Enterprises on Thursday, 5th February 2015; the Committee expressed concern over the low tax to GDP ratio of Uganda.


By Gerald Ssendaula


While the members of the Board of Directors of Uganda Revenue Authority were appearing before the Committee on Commissions, Statutory Authorities and State Enterprises on Thursday, 5th February 2015; the Committee expressed concern over the low tax to GDP ratio of Uganda.

In response, I stated that the low tax to GDP ratio has been a challenge but could be improved if concerted and deliberate effort is made towards widening the tax base.

I informed the Committee that the tax to GDP ratio of Uganda was the lowest in the East African region and that it was imperative for Uganda to consider initiatives of raising the tax to GDP ratio.

As an example of an initiative that could be passed into law to widen the tax base, I proposed that a tax on land (idle or productive) be introduced since land was the biggest asset and yet it is not taxed. However this is my personal opinion which I have not yet introduced to the Government/Ministry of Finance, Planning and Economic Development for consideration.

Following a number of varying opinions on this subject, I thought it prudent to clarify my views about taxing land and I am available for further engagement on this topic should the need arise

Over the last two decades, Uganda has registered impressive real GDP growth rates averaging about 7% year on year. Despite these significant achievements, it is noted that the translation of these reforms into tax effort lags behind, as indicated by the tax to GDP ratio which only moved from 6.8% recorded in 1991/92 to 13.3% as recorded in 2013/14.

After rebasing of the country’s GDP figures, the current tax to GDP ratio is 11.7% for FY 2013/14. This ratio is low by both regional and international standards. After rebasing GDP in FY 2014/15, Kenya’s tax to GDP ratio is 19.3% while Tanzania’s is 12.6%.

Whereas some countries in the Sub-Saharan region took a similar route for reforms, the translation of these reforms into tax effort gained more momentum than what Uganda has been posting.

The percentage of tax to GDP ratio from International Trade Taxes reduced from 6.63% in FY 2000/01 to 5.87 in FY 2013/2014 (before rebase). This is mainly due to on-going trade liberalization where Uganda is now part of regional trade blocks such as Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Africa Free Trade Zone (AFTZ) in creation and Intergovernmental Authority on Development (IGAD) that is almost creating a free trade area. The tax to GDP ratio of Domestic Taxes on the hand only increased from 5.42% in FY 2000/01 to 7.72% in FY 2013/14. This is below the desirable standard.

The country should have a concerted effort to bridge the gap through domestic taxation if it is to remain competitive in the East African Region and the world.

The lag in growth of Uganda’s tax to GDP ratio is mainly caused by low contributions to tax in comparison with the significant contributions to GDP.

Below is a table showing the sectoral contribution to GDP and tax.
 


The largest share of Uganda’s GDP, 27.21%, is generated by the Agriculture Sector and Agriculture is carried out on land.

However, this sector only contributes very little to tax i.e. 0.81%. The country must take deliberate measures to ensure that there is increased revenue from agriculture and taxing land (after consideration of the varying production levels) is one such measure.

Other sectors whose contribution to GDP is not matched with an equitable contribution to tax include; the Construction, Education and Real Estate Sectors whose contributions to GDP of 8.01%, 5.79% and 4.21% are matched with contributions to tax of 2.70%, 1.75% and 1.36% respectively.

In order to boost Uganda’s tax efforts and improve the tax to GDP ratio, more efforts have to be put into increasing the contribution of the aforementioned sectors to tax revenue. This can only be achieved through administrative and policy interventions.

So far, policy interventions have been put in place to improve taxation of the Real Estate and Education Sectors i.e. beginning in FY 2014/15, rental tax was ring-fenced in order to boost the Real Estate Sector’s contribution to tax; and Corporation Tax was re-instated on private schools in order to increase the Education Sector’s contribution to tax. Administrative interventions have also been put in place with the tax Authority focusing on the Construction, Real Estate and Education Sectors this financial year.

Having the greatest discrepancy between contribution to GDP and tax, it is only prudent that interventions be put in place to improve the Agriculture Sector’s contribution to tax.

An analysis of developed countries and developing countries around the world showed that countries with a higher contribution of the Agricultural Sector to GDP had low tax to GDP ratios. This is mainly because Agriculture is a primary product and only value addition can increase on the economy’s output. Uganda needs to add value to Agriculture through making land productive and thus attract taxes to support further value addition.

Inability to effectively tax Agricultural income symbolises a major source of inequality in the tax system leading to lower compliance and a low tax to GDP ratio.

Countries like Denmark, Estonia, Chile and South Africa have indeed implemented land value tax on grounds of raising public finances among other reasons. My view as a responsible citizen is that taxing land would stimulate economic development by obliging landowners to develop vacant and under used land properly or make it available for development purposes.

I believe that this is an issue which the Government should consider and give legal effect in order to widen the tax base.

Different countries have used varying methods of taxing land ranging from relying on the annual rental value to determine the base of their property tax to applying a flat rate tax to the land. However these are secondary issues which can be considered in detail at a later stage once the taxation principle is agreed upon by all the relevant stakeholders.

The writer is the chairman of the Uganda Revenue Authority (URA) board of directors

 

(adsbygoogle = window.adsbygoogle || []).push({});