Have tax reforms made the poor worse or better off in Uganda? Which taxes are progressive? This paper from The International Monetary Fund (IMF), examines tax policy and tax reforms in Uganda. Using household survey evidence it reveals that some of the tax reforms implemented in the 1990s were generally pro-poor. The paper demonstrates that even when Uganda’s level of public revenue is low at the macroeconomic level, rapidly increasing taxation may pose a constraint to private investment at the microeconomic level.
Government revenue was only five per cent of Gross Domestic Product (GDP) when Uganda began its recovery in 1986. One of the major accomplishments of Uganda’s recovery was that the National Resistance Movement (NRM) government rescinded predatory taxation on exports in the early 1990s. At the same time, the need for public spending on social services and infrastructure was huge. Hence, policy makers pursued a rapid increase in domestic revenue and a corresponding increase in public services.
Institution building for tax administration resulted in the creation of the semi-autonomous Uganda Revenue Authority (URA) in 1991. The URA doubled domestic revenue in real terms during the first half of the 1990s. Yet expansion in government expenditure as a result of increased domestic revenue was not sustainable. Since 1996, recovery has stalled because:
- The policy of increasing public revenue has curtailed the scope for trade reform as tariffs and other import taxes were retained, often at high levels. Even by 1996, import taxes still accounted for more than half of total revenue.
- Import taxes are ultimately born by export producers. Initially, the Ugandan government failed to recognise the close relationship between export taxes and import taxes.
- Targets were not backed by strategy. The government’s explicit target of increasing revenue by one per cent of GDP per year was unsuccessful. It lacked backup and was reliant upon unpopular ad-hoc increases in tax rates, particularly fuel tax.
- Resource misallocation and foregone private investment probably undermined growth.
- The cost of taxation was high in terms of bureaucracy and opportunities for corruption.
- The granting of firm specific exemptions and tax holidays adversely affected competition.
Ugandan policy makers have been adept at adjusting economic policy. The system is being transformed from one of high tax rates and selective incentives to one of low rates and more standard provisions. Other successful tax administration should focus on:
- Enhanced efforts to combat corruption and mechanisms to resolve grievances between business and the tax authority.
- Training, regular dialogue and education for taxpayers and administrative staff. If tax administration is not fair and efficient the best intentions of policymakers can be distorted.
- Investigating the strong case for harmonising fuel taxes across the region to provide a level playing field and ensure Uganda is not disadvantaged compared to its neighbours.
- Refraining from raising the nominal tax rates. At present Uganda appears, to foreign investors, to have higher taxes than neighbouring countries such as Kenya.
