The importance of predictability, stability and simplicity in the tax system cannot be underscored.
Making the right tax policy decisions provides clarity and certainty to every Ugandan and business enterprise.
A competitive and effective tax system, which is central to every Government hinges on the quality of tax law and the way in which tax policy is made.
It is basically about how Government proposes, consults, legislates, implements and evaluates changes to the tax system. Tax legislation provides for the collection of much needed revenues and impacts on every individual and business.
To a businessman in any part of the country and a tax professional like myself, the importance of predictability, stability and simplicity in the tax system cannot be underscored. If these are ignored, we have a tax system that is reactive, resulting in tax changes that are unexpected and have not been thoroughly thought through and analysed.
The past few months of this financial year have been busy with the introduction of key tax changes, followed by corrections, contradiction, disowning, amendment, withdrawal of some. This has happened in the midst of vast tax debates fueled by the fire of social media, turning many into tax experts.
Whereas the Government is commended for responding to the public outcry, lobbying and debates, it is evident that some tax changes required closer scrutiny and deeper analysis by Government and other stakeholders before they became law or better still before they made their way into tax bills. This is particularly so with respect to the withholding VAT system and the 1% (now 0.5%) Excise duty on mobile money.
The Minister of Finance, Planning and Economic Development has revoked Legal Notice No. 12 of 2018 which had designated 680 taxpayers as withholding VAT agents effective 1 July 2018. The suspended withholding VAT system required the designated agents to withhold the entire amount of VAT charged by suppliers and remit this to the URA. The withholding VAT system was meant to operate alongside the normal procedure of charging and accounting for the VAT, which meant that the URA would receive a double VAT payment for each invoice raised with VAT. This posed significant cash flow challenges to businesses and worse still the withholding VAT system did not provide for any exemption for compliant taxpayers or key sectors of the economy.
It therefore brings much relief that the system is now suspended and I use the word suspended because the VAT (Withholding Tax) Regulations, 2018 are still in force and Section 5 of the VAT Act that provides for withholding VAT is still intact. Accordingly, I believe it will only be a matter of time before the withholding VAT system is re-introduced. Hopefully, this will be preceded by thorough analytics to determine the appropriate proportion of VAT to be withheld without crippling the cash flow of businesses.
On the Excise duty front, it is quite unfortunate that 164 Members of Parliament voted to retain “mobile money tax” after Parliament passed the Excise Duty (Amendment) Bill No.2 of 2018 to reduce the “mobile money tax” to 0.5% on withdrawal of mobile money from 1% on mobile money transactions on “receiving money, making payments and withdrawals” of money. This tax has had a crippling effect on mobile money business this financial year, witnessed by a dip in mobile money usage since it was introduced effective 1 July 2018. The implications of this “mobile money tax” have been widely reported particularly limiting financial inclusion i.e individuals and businesses that have access to useful and affordable financial products and services that meet their needs. It is estimated that 46% of adults were financially included in 2017, primarily through mobile money at 43% and banks at 11%.
It is not in doubt that mobile money has been the biggest driver of financial inclusion over the last five years, with an estimated 94% of financially included adult Ugandans having a mobile money account. As per the 2017 GSMA report on Taxing Mobile Connectivity in Sub-Saharan Africa, mobile money services have driven greater financial inclusion in many developing countries, enabling those people without access to traditional banking and financial services to pay, transfer and save money through their mobile phones, with an estimated 40% of adults in the Sub-Saharan Africa using mobile money. In view of the growth in mobile money services and financial inclusion, one wonders why the Government of Uganda would seek to add another layer of tax that will clearly deter the use of mobile money services, and exclude some Ugandans from the benefits of financial inclusion.
The 175 MPs who stayed away from Parliament when the law was passed, probably because they did not want to go on record as having defied their party line or did want to annoy their voters attests to the negative impact of this tax on the estimated 23 million mobile money users who now have to part with 0.5% of every amount withdrawn.
The drama and confusion witnessed this financial year around the introduction of withholding VAT and the 1% (now 0.5%) “mobile money tax” creates an impression that the tax changes were not subjected to deep analysis i.e. either, public consultation was not adequate and or that key stakeholders were ignored before these tax changes were introduced. Further, “mobile money tax” in particular, seems to have been considered in isolation without due regard to the strategies implemented over the years to grow financial literacy and financial inclusion for example, the National Financial Inclusion Strategy 2017 -2022 launched by Bank of Uganda and Ministry of Finance, Planning and Economic Development in October 2017.
The amendments, revisions and withdrawals do not reflect well on Government. The process would have benefited more from a deliberate approach by the Government in the development, legislation and implementation of the tax changes. This would involve wide consultation of the public and key stakeholders, conducting wide taxpayer education and ensuring that URA systems and processes have been duly updated prior to commencement of tax changes. Playing catch-up for example amending tax return templates a month after tax changes take effect shows a divide between tax policy and tax administration in developing and implementation of tax laws.
The intentions of Government are commendable, especially as they are driven by the need to grow our revenue collections and increase our GDP-to-tax ratio currently at 14.2%, being the lowest in the region. However, the revenue growth efforts should be done in a manner that is supportive of economic growth, employment and investment. The often competing objectives of economic growth and revenue growth have to be balanced against each other.
Parliament on its part has to play a stronger and more effective role in scrutinizing tax proposals. This will require tasking Government to provide more information on the rationale for tax policy changes, the supporting analysis and assumptions made as well as the impact of the proposed changes. This will definitely require investing time and applying a substantive approach when handling tax policy changes.
There are other tax changes in the pipeline, such as the introduction of electronic tax registers. Hopefully, these will have wider stakeholder engagement and taxpayer education before implementation.
The writer is an Associate Director in Tax at PwC Uganda