Local service tax is ideal for the Government

Mar 19, 2008

I wish to respond to Hon Alex Byarugaba’s opinion piece in The New Vision of March 18, titled “Govt can avoid local service tax.”

By Yasin Sendaula

I wish to respond to Hon Alex Byarugaba’s opinion piece in The New Vision of March 18, titled “Govt can avoid local service tax.”

Byarugaba argued that the bill seeking to introduce the local service tax and the hotel tax assumes the existence of hotels in all areas across the country. He added that the local service tax is criticised by workers employed in the formal sector as double taxation, and that the hotel tax is a disincentive to the tourism industry.

As an alternative, Byarugaba proposed an increase in VAT from 18% to 19% and the introduction of community development levies. The bill does not “assume” that hotels exist across the country; it is a fact that hotels are mainly located in urban centres. As such, it is the urban councils that will mainly benefit from the hotel tax. The hotel tax room charge per night will range from sh3,400 ($2) for a five star hotel to sh1,000 for local lodges charging sh10,000.

These charges are too minimal to cause a disincentive to the hotel and tourism industry. Local governments will plough back the proceeds from hotel tax or other sources to offer incentives like access roads, street beautification and serviced plots in order to attract hoteliers and lodgers in their localities.

Byarugaba also argued that the introduction of local service tax on top of “Pay As You Earn” (PAYE) is double taxation for the salaried workers. Local service tax is not applied to a worker’s gross pay. It is charged on the net pay after PAYE and other statutory deductions. In other words, PAYE and other statutory deductions like NSSF are tax-allowable when computing the service tax.

PAYE is approximately 30% of the worker’s gross pay. The extra burden created by local service tax on the worker’s income is less than 1% for all local service tax payers in gainful employment. The overall tax burden is about 31% to formal salaried workers. Comparatively, formal salaried workers in developed countries pay more than 50% on their salaries towards national taxes and local/federal taxes. Therefore, it is not true that the formal salaried workers are heavily taxed by the Government.

Self-employed and practicing professional, business people, self-employed artisans, commercial farmers do not pay income tax on their personal incomes to the Government. Therefore, local service tax is ideal for this category of income earners. The proposal to increase Value Added Tax (VAT) from 18% to 19% is not tenable for these reasons:

l The increase in VAT and PAYE provisions would make Uganda less competitive compared to other countries in the region. VAT rates in other countries in the region are lower than 18%. Therefore, this will dissuade potential investors from coming to Uganda.

-Increase in VAT will depress consumption which adversely affects aggregate demand hence undermining industrial growth and development.

- Increasing indirect taxes will hurt the poor more than the direct taxes, because it is inequity. Therefore, local service tax is pro-poor.

- The Government is over-stretched with other national expenditure priorities like inadequate electricity supply, international and domestic debts. This means that expenditure priorities of local governments may not be financed.

The proposed community development levy may not differ from the local service tax. The proceeds from local service tax will be spent on basic services such as sanitation, education, health, construction and maintenance of roads in local governments. The hotel tax will be used for garbage collection and general cleanliness of the urban areas.

Paying taxes is a national and constitutional civic duty. The purpose is to enhance accountability and social service delivery.

The writer is a public finance analyst and consultant

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