ANALYSIS: Raising excise duty may not guarantee the anticipated benefits but will increase the cost of doing business and force a rethink of new investment to the country.
and Emmy Olaki
Raising excise duty may not guarantee the anticipated benefits but will increase the cost of doing business and force a rethink of new investment to the country.
In the last Budget, the finance minister, Dr Ezra Suruma announced an increase in excise duty on mobile phone airtime from 10% to 12% and Value Added Tax (VAT) from 17% to 18%.
He also increased excise duty on petrol. But effective July 1, he also increased excise tax on cigarettes.
The increases have led to price increases and a suspension of cigarette manufacture by British American Tobacco Uganda (BATU) at their Jinja plant.
â€œThe increases as announced by the minister mean the tax differential between Uganda and her neighbours is so high it attracts smugglers,â€ BATU spokesman, Jimmy Kiberu said.
â€œThis could be the death knell of legitimate manufacturing in this country,â€ he said.
Smugglers have affected BATUâ€™s operations to the extent that it was cited as one of the reasons for the tobacco manufacturerâ€™s end of year loss last year.
Experts estimate that the Government loses up to sh6b in excise duty to smuggling.
The suspension of production would take as long as is necessary for BATU to hammer out a compromise with the Government, Kiberu said.
He declined to comment on whether or not his firm is considering closing down the factory and importing its cigarettes from its regional affiliates.
Mobile phone companies in the first synchronised action since the inception of the 10-year old industry last week announced they were unwilling to absorb the increased taxes and were passing it on to the public, effectively increasing mobile phone calling rates by 30%.
Mobile phone company executives think the increases are self-defeating in the context of the Governmentâ€™s ambitions.
â€œHow do you increase penetration if the tax policy only makes the service less affordable. We have had extensive discussions with the various stakeholders with regard to the negative impact of the high taxes, but unfortunately, the response is to increase taxes,â€ Hansen Paulsen, the uganda telecom marketing manager, said.
Operators agree that lower taxes would allow them to expand the networks into uncovered areas.
MTN chief operations officer, Serame Taukobong, said to keep their investment plans on course, they have been forced to pass on the tax to the consumer. There is a correlation between levels of development and telephone penetration. The higher the penetration, the higher the level of development.
Observers also warn that the increase is symptomatic of a wider problem with the countryâ€™s policies.
â€œAre we interested in attracting investment to this country? Then why are we making it so difficult for investors to do business here?,â€ a senior business manager asked.
â€œTo make any significant investment, you need to anticipate with some degree of certainity Governmentâ€™s policy over five, 10, 20 years.
â€œBut when you have a government like ours flip-flopping about on important policies, you think twice about parking your money here,â€ he said.
Excise duty increase to stifle investment