Balancing growth and revenue generation is a fiscal puzzle of our time

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OPINION

By Prof. Augustus Nuwagaba (PhD)

How can Uganda raise domestic revenue without hampering the competitiveness of businesses? Here are my insights.

1) Broaden the tax base beyond traditional sectors. It is important to have modest levies on high-value services, digital transactions, and luxury goods, and those areas that don’t directly hit the cost of production for manufacturers. 

For example, URA has pioneered this with the expansion of the scope of EFRIS adoption to sectors such as construction, Real estate, Arts and Entertainment, etc.

Available data indicate that TINs have expanded the tax base by integrating National ID systems, registering over 350,000 informal taxpayers by 2022. In addition, EFRIS has enhanced VAT compliance by enabling real-time transaction tracking, leading to a 12 percent rise in VAT collections and curbing tax fraud.

Another way of broadening the tax base is through encouraging the formalisation of businesses and sectors like artisanal mining, using technology for better collection, and streamlining processes to reduce tax evasion.

2) How about if we harnessed the digital economy? A small and well-designed transaction tax on e-commerce and mobile payments can capture value that currently slips through the cracks while keeping compliance low for SMEs.  Given the rapid growth of e-commerce and mobile payments in Uganda, even a small tax rate could yield significant and consistent revenue streams for the Government.  For instance, between 2015 and 2019, mobile money transactions in Uganda more than doubled in value, from about $9 billion to $20 billion.

Taking an example from Kenya, which fostered an environment for digital transactions by investing in digital infrastructure through expanding access to high-speed internet, improving the digitisation of government services, and developing skills for the digital economy.

Kenya also has a Digital Superhighway Project, which seeks to strengthen the country’s ICT backbone. The Digital Superhighway will prioritise the expansion of Kenya’s fibre network coverage countrywide, with plans to lay 100,000 kilometres (62,000 miles) of fibre optic cable and erect 25,000 public Wi-Fi hotspots.

3) Upgrade tax administration. Real-time data analytics and risk-based audits can help in reducing compliance burdens and increasing voluntary compliance, and turning revenue leakage into predictable income.  Through using this strategy, the tax administrators move away from the reactive manual audit system to being proactive and data-driven, hence improving fairness and building taxpayer trust in the system, and ultimately strengthening fiscal governance and domestic revenue mobilisation.

A number of countries now use a computerised risk-based procedure to prioritise corporate income tax and VAT filers. They are also using big data analytics and e-invoicing solutions to monitor transactions and VAT under-reporting.  South Africa and Kenya are using data analytics and AI to improve compliance monitoring. Nigeria and Ghana are implementing a cloud-based unified tax portal to process real-time data across tax systems. 

4) Pair revenue measures with targeted incentives. Sometimes it’s important that we offer tax credit for firms that invest in automation or green technology to boost their productivity and future tax yields without sacrificing today’s competitiveness. The move, for instance, by the Uganda Government to grant a three-year income tax exemption for eligible business start-ups effective July 1st, 2025, is a very welcome move that encourages the growth of small businesses, and these are future taxpayers.

5) Public-private partnerships (PPPs). Co-funding of infrastructure, such as energy and transport, through blended financing reduces business costs and expands the tax base while creating a good growth cycle.  PPPs have been considered at the top of the Egyptian economic reform agenda, as a way of increasing private sector involvement in public services.

Although not a PPP project, the Grand Ethiopian Renaissance Dam (GERD) was financed domestically, and this helped in reducing the challenges that would arise if the country had financed the project through external debt.

Once these measures are adopted, the economy should be able to leapfrog to higher levels of productivity and growth.

The writer is the Deputy Governor, Bank of Uganda