Government will benefit more from indirect taxes
Sep 13, 2007
RECENTLY, the Minister of State for Local Government, Hope Mwesigye, tabled the Local Government Amendment Bill in Parliament. The bill seeks to introduce new taxes payable to the local governments to get revenues to replace graduated tax.
Vincent Semakula
RECENTLY, the Minister of State for Local Government, Hope Mwesigye, tabled the Local Government Amendment Bill in Parliament. The bill seeks to introduce new taxes payable to the local governments to get revenues to replace graduated tax.
Prior to the abolition of graduated tax, local governments used to collect about sh85b annually. The money was instrumental in bridging the funding gap in the central Government grants. Local governments used the funds to carry out tasks like giving bursaries to needy children, paying allowances to staff and political leaders, co-funding government projects like the National Agricultural Advisory Services and monitoring field activities.
Local governments advised against the abolition of graduated tax, but the Government promised compensation.
However, the compensation has remained evasive. At times, local governments’ unconditional grants have not been sufficient enough to cover the wage bill. This has made some staff go for greener pastures, leaving the districts understaffed. Many districts have vacant positions of up to 50%.
Will the proposed Local Service Tax solve the problem of inadequate financing in the local governments? Firstly, compliance will be extremely low since graduated tax was only recently abolished. At the time of abolishing the tax, it was stated that the decision would be reviewed after 10 years.
Secondly, direct taxes are more difficult to collect than the indirect ones. In fact, most local governments in East Africa are entirely financed by the central governments and no longer levy any direct personal tax. In the developed world, for example in Denmark, the taxes are collected by the central authority and shared out as follows: central government 43%, districts 48%, regions 9%. In Japan the local governments take a hefty 60% of the budget, leaving the central government with 40%. Uganda’s local governments are still at a miserable 20% of the budget.
Thirdly, the would-be payers in most sub-counties fall in the exempted category, that is primary school teachers, local chiefs, nurses and shopkeepers because the bill says all persons earning not more that sh200,000 a month are exempted.
Similarly, farmers and cattle-keepers with less than five acres and less than 30 head of cattle are exempted. Few people have more than five acres of coffee or 30 cows in any sub-county. Consequently, in the absence of graduated tax compensation, the local governments will certainly collapse, of course, with dire consequences for the national economy and overall service delivery.
Fourthly, many employees have already complained about the new tax accusing the Minister of imposing double taxation. They argue that they pay income tax or pay as you earn (PAYE), of more than 30% of their salaries. The new taxes will push personal taxes to about 50% of one’s annual salary.
The Government should consider other possible alternatives. Rumour has it that following the abolition of graduated tax, the Government raised Value Added Tax (VAT) by 1% in order to realise sh85b to fund local governments. However, due to other pressing needs, the funds were not released to the local governments.
We could still increase VAT to 19% or increase PAYE and income tax to about 40% (as is the case in most economies). This indirect tax is easier to collect and will yield sufficient funds, which will be passed on to the local governments as unconditional grants.
But there is need to entrench the sharing of funds between the central and the local governments in the legal framework. A provision in the Local Government Act such as: “1% of VAT and 10% of PAYE shall be remitted to the local governments as un-conditional grantsâ€, will ensure compliance by the Ministry of Finance.
Funding local governments should not be viewed as optional or an unnecessary burden.
The tasks and mandates assigned to local governments are essential and form the basic social services: primary education, feeder roads, primary healthcare, agriculture, community mobilisation, and democracy. It should also be remembered that Uganda is a signatory to the UN resolution of implementing the Millennium Development Goals by the year 2015.
This is not far away, yet we have not achieved even a quarter of these goals. To quote former UN Secretary General, Kofi Anani: “No country will succeed in achieving the millennium goals, unless it empowers its local governmentsâ€.
The Writer is the chairperson of Rakai district
RECENTLY, the Minister of State for Local Government, Hope Mwesigye, tabled the Local Government Amendment Bill in Parliament. The bill seeks to introduce new taxes payable to the local governments to get revenues to replace graduated tax.
Prior to the abolition of graduated tax, local governments used to collect about sh85b annually. The money was instrumental in bridging the funding gap in the central Government grants. Local governments used the funds to carry out tasks like giving bursaries to needy children, paying allowances to staff and political leaders, co-funding government projects like the National Agricultural Advisory Services and monitoring field activities.
Local governments advised against the abolition of graduated tax, but the Government promised compensation.
However, the compensation has remained evasive. At times, local governments’ unconditional grants have not been sufficient enough to cover the wage bill. This has made some staff go for greener pastures, leaving the districts understaffed. Many districts have vacant positions of up to 50%.
Will the proposed Local Service Tax solve the problem of inadequate financing in the local governments? Firstly, compliance will be extremely low since graduated tax was only recently abolished. At the time of abolishing the tax, it was stated that the decision would be reviewed after 10 years.
Secondly, direct taxes are more difficult to collect than the indirect ones. In fact, most local governments in East Africa are entirely financed by the central governments and no longer levy any direct personal tax. In the developed world, for example in Denmark, the taxes are collected by the central authority and shared out as follows: central government 43%, districts 48%, regions 9%. In Japan the local governments take a hefty 60% of the budget, leaving the central government with 40%. Uganda’s local governments are still at a miserable 20% of the budget.
Thirdly, the would-be payers in most sub-counties fall in the exempted category, that is primary school teachers, local chiefs, nurses and shopkeepers because the bill says all persons earning not more that sh200,000 a month are exempted.
Similarly, farmers and cattle-keepers with less than five acres and less than 30 head of cattle are exempted. Few people have more than five acres of coffee or 30 cows in any sub-county. Consequently, in the absence of graduated tax compensation, the local governments will certainly collapse, of course, with dire consequences for the national economy and overall service delivery.
Fourthly, many employees have already complained about the new tax accusing the Minister of imposing double taxation. They argue that they pay income tax or pay as you earn (PAYE), of more than 30% of their salaries. The new taxes will push personal taxes to about 50% of one’s annual salary.
The Government should consider other possible alternatives. Rumour has it that following the abolition of graduated tax, the Government raised Value Added Tax (VAT) by 1% in order to realise sh85b to fund local governments. However, due to other pressing needs, the funds were not released to the local governments.
We could still increase VAT to 19% or increase PAYE and income tax to about 40% (as is the case in most economies). This indirect tax is easier to collect and will yield sufficient funds, which will be passed on to the local governments as unconditional grants.
But there is need to entrench the sharing of funds between the central and the local governments in the legal framework. A provision in the Local Government Act such as: “1% of VAT and 10% of PAYE shall be remitted to the local governments as un-conditional grantsâ€, will ensure compliance by the Ministry of Finance.
Funding local governments should not be viewed as optional or an unnecessary burden.
The tasks and mandates assigned to local governments are essential and form the basic social services: primary education, feeder roads, primary healthcare, agriculture, community mobilisation, and democracy. It should also be remembered that Uganda is a signatory to the UN resolution of implementing the Millennium Development Goals by the year 2015.
This is not far away, yet we have not achieved even a quarter of these goals. To quote former UN Secretary General, Kofi Anani: “No country will succeed in achieving the millennium goals, unless it empowers its local governmentsâ€.
The Writer is the chairperson of Rakai district