Monday, April 25, 2011


The “Walk to Work” campaign continued to grab headlines last week. The campaign is in protest over the rising cost of living.

Inflation rose to 11.1% in March on the back of higher food and fuel prices. Apart from a poor harvest which stressed food supplies, a depreciating shilling and rising oil prices on the world scene have also fueled the upward trend of prices.

In Kenya last week the government reduced the duties on diesel and kerosene to try and stem the price increases. Interestingly this came barely a week after the government had to raise the cap on fuel prices.

Finance minister Uhuru Kenyatta’s announcement last week may have caused a warm feeling in the Kenyan public but it may soon come back to bite him in the wrong side when he inevitably has to raise taxes on the same items again soon.

President Yoweri Museveni told journalists last week his government would not reduce taxes on fuel because “We are not going to subsidise consumption”. That is the correct economic line to take.

However good economic sense may not stand up to political expediency, but that will be a story for another day.

Plotting the correct government response to this situation is always going to be a tricky one, especially since government scope for tax concessions is so limited. And that is where I see government has boxed itself into a corner.

Revenue collections have risen a thousandfold since 1986 to the current sh5 trillion. That is not an achievement to be laughed at, however as they say the devil is in the detail.

Taxes from international trade and then income tax accounted for the highest collections with consumption taxes lagging behind the two.

Looking at more developed economies the more sustainable model is for income tax to dominate our revenue collections. In the US income tax accounts for nearly half of all revenues collected while in the UK it is about 30% with the next tax head being National Insurance contributions and then VAT.

In the UK corporarion tax accounts for 8.2% while fuel revenues come in at 0.5%. IN Uganda petroleum duty almost doubles our takings from corporation tax.
The reason we are so dependent on international trade taxes is because they are the easiest to collect, for instance VAT from International trade is significantly higher that from local consumption.

It has become cliché but what this points to is an urgent need to widen the tax base, to rope in more tax payers especially domestically.

"As it stands now because of government’s overdependence on fuel taxes, it has no room to maneuver in trying to mitigate current rises in fuel prices....

That being said the tax component on a liter of petrol or diesel is 24% and 18% respectively.

This suggests that government’s capacity to reduce fuel prices would be best applied by improving the rail and water transport systems, which are much cheaper than road transport and speeding up other bureaucratic procedures that would increase the cost of getting fuel to the pump.

But I digress. It would be fair to say that a lot of people go untaxed in our country but because we are comfortable with the easy pickings from international trade taxes, PAYE and corporation taxes, we seem unable to find them out.

The officials at the URA would say it will cost too much in manpower and other resources to further widen the tax base and they would rather concentrate on milking the existing base, but I think it would be a better use of tax payer money beefing up URA to collect from a wider base than opening up new districts whenever someone eats a rat.

New districts are subsidizing consumption but more URA field officers would be an investment.

"As an initial step of ensuring every Ugandan who earns an income pays his just dues, let URA officials fan out into the suburbs of Kampala and not only ferret out tax defaulting landlords but in addition, require evidence of income that allows some of us to build our own homes...

The point is that if we can widen our tax base government would have more room for maneuver in offering relief to Ugandans.

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