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Uganda: Proposal for return of graduated tax opposed

Friday April 22 2016
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Uganda’s civil society has called for the return of a direct tax on employed citizens. FILE PHOTO | MORGAN MBABAZI

A civil society proposal to reintroduce graduated tax, a levy imposed on Ugandans that was suspended for 10 years at the beginning of the 2005/06 financial year, has been opposed by experts and taxpayers.

The tax was paid by citizens in employment aged between 18 and 65, and was collected by local governments across the country. But growing concern among policy technocrats over its diminished economic value, and widespread complaints of harsh enforcement actions by local council officials, led to its suspension in 2005.

In 2001, the minimum graduated tax rate was fixed at Ush3,000 ($0.8) per year for taxpayers who earned less than Ush60,000 ($17.8) per annum. Those who earned more than Ush1,560,000 ($462) per year were charged Ush100,000 ($29.6) per annum; the entire tax structure contained 17 income bands.

“The government is allocating more unconditional grants to local authorities to enable them to mitigate the loss of revenue attached to graduated tax. There is little hope of reintroducing the tax following omission of this item from the list of new tax measures submitted to parliament for the period 2016/17,” said Jim Mugunga, the spokesperson for the Ministry of Finance, Planning and Economic Development.

The call for restoration of the tax by some politicians and civil society activists is due to the failure to develop alternative sources of internal revenue by local governments, the relatively weak performance of existing fiscal measures meant to compensate for the absence of revenues, and the modest funding flows channelled by the Treasury to local authorities.

“Local governments used to spend 10 to 45 per cent of graduated tax revenues on collection costs per year. Local service tax has wide structural imbalances, with Kampala and Wakiso districts getting the lion’s share of revenues estimated at Ush14 billion ($4 million) in 2014. Most districts prefer graduated tax because it carries more evenly spread mobilisation benefits compared with local service tax,” said Julius Mukunda, the co-ordinator of the Civil Society Budget Advocacy Group.

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Many local authorities depend on the central government for 93 per cent of their funding needs, including payment of staff salaries and allowances. Financial support offered to local governments includes non wage recurrent conditional grants that stood at Ush42,085,655,560 ($12.5 million) for the first quarter of 2015/16.

Though local service tax (LST) — an income tier-based tax levied on salaried employees, and local hotel tax (LHT) — were introduced in 2008 to plug revenue gaps created by the suspension of graduated tax, low collections have dampened hopes of self reliance among local governments.

Overall revenue performance for these tax streams was estimated at just 7.3 per cent of the official targets during the 2008/09 financial year. Total LST collections stood at Ush3.9 billion ($1.7 million) while LHT collections amounted to Ush1 billion ($447,427), against a target of Ush67 billion ($29.9 million) during the period under review.

Overall resources generated from LST were estimated at Ush14 billion ($4 million) at the end of 2014, civil society sources claim — much lower than the Ush70 billion ($20.7 million) realised from graduated tax per year prior to its suspension.

The graduated tax compensation fund of Ush45 billion ($13 million) per annum that was created by the government to supplement local authorities’ coffers has yielded little fruit; the average share of available resources available for each local government diminishes every year as new administrative units emerge.

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