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Ugandan traders keep cash out of banks, hurt tax collection

Saturday June 04 2016
Kikuubotraders2322

Traders in Kikuubo, Uganda. Uganda Revenue Authority, banks express concern that businesses prefer transacting in cash rather than use the banking system. PHOTO | FILE

The stronger revenue collection measures adopted by the Uganda Revenue Authority last year have scared several businesses and inspired elusive tactics that include accumulation of substantial cash in their premises, a trend that has affected tax collections and growth of bank deposits while undermining local production, experts say.

Whereas data on the number of businesses engaged in this practice and the amount of money involved was not available, key sources in URA and in banks expressed concern that businesses are preferring to transact in cash rather than use the banking system.

The practice seems common among small and medium sized taxpayers, The EastAfrican has learnt.

Stiff measures dominated by the use of agency notices — a legal option that allows URA to recover outstanding taxes from stubborn taxpayers through blocking their bank accounts and attaching available funds till the tax liabilities are fully cleared — have been cited as a possible key motivator for businesses to shun bank deposits in order to escape the tax net.

The use of agency notices against defaulting taxpayers is often preceded by numerous reminders from the tax agency to pay outstanding taxes before the close of the financial year. Other punitive actions include shutting down defaulting businesses, confiscating cargo containers and prosecution of errant taxpayers.

Increased cases of huge cash stocks held by some businesses have resulted in frequent cash payments to suppliers and other parties, growing use of mobile money services for execution of financial transactions and purchase of physical goods, sources claim.

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Fears of other prying eyes

Though some businesses have been hit by the hard times, as demonstrated by rising loan and tax default levels, other firms with long experience in the informal sector are still coming to terms with mounting enforcement pressures by Uganda’s taxman leading to poor compliance habits, observers say.

The flight from banks to reliance on the risky option of keeping hard cash is attributed to fears of other prying eyes like the Financial Intelligence Authority (FIA). According to Inspector General of Government Irene Mulyagonja, the corrupt are hiding their money in real estate.

A Bank of Uganda directive that all money transactions above Ush20 million ($5,875) be transacted by cheque and a related requirement that for a purchase of property above Ush50 million ($14,688), the source of money be declared, have all gone unheeded.

Widespread investments in idle, physical assets deprives the economy of valuable resources needed to support viable productive ventures, particularly in the services sector by keeping interest rates high — a scenario that amounts to limited economic growth, economists argue.

Consequently, revenue collections have suffered in recent months while banks have experienced slower deposit growth, a challenge reflected in aggressive deposit promotion campaigns carried out by leading banks since March.

“Stringent enforcement actions implemented by URA have discouraged many businesses from depositing cash in banks. Some business people are also buying building materials like cement in order to conserve their cash resources. This has resulted in increased cases of people avoiding payment of tax obligations while leaving the burden to a few, rising stocks of hard cash held by traders and fewer cash deposits mobilised by banks,” said an external auditor at KSK Associates.

Revenue collection

Total revenue collections for the first nine months of 2015/16 stood at Ush8,139.06 billion ($2 billion) a deficit of Ush194.62 billion ($57.9 million), an outcome largely blamed on negative economic conditions and the side effects of the General Election.

For example, Pay As You Earn (PAYE) returns recorded a shortfall of Ush19 billion ($5.7 million) between July 2015 and March due to weak cash flow in the telecommunications sector and a slowdown in business activity the oil and gas and banking sectors, URA data showed.

Financial analysts claim the overall tax revenue deficit rose to Ush300 billion ($88 million) last month; a factor that has put pressure on the taxman to bridge the revenue gap with less than a month left to the close of this financial year.

Total deposits held by Ugandan commercial banks grew by 12.1 per cent in 2015 compared with 14.9 per cent growth posted in 2014, latest Bank of Uganda data shows. Shilling deposits increased by 1.8 per cent to Ush8.52 trillion ($2.5 billion) in 2015 compared with a 13.8 per cent growth during the previous year.

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