The Uganda Revenue Authority(URA) has lurched onto a new way to collect income tax.
Starting in June this year URA has taken advantage of property transactions – cars, land and buildings to collect income tax. How it works is if you want to buy a property, when paying stamp duty to effect the transfer URA will check whether you are tax compliant if not the y will deem the sum you paid for the property as undeclared income and will slap a 30% tax on it. This is for transactions over sh50m.
It is estimated that up to 70% of the Ugandan economy is in the informal sector, meaning a lot of transactions are done under the radar, mostly done using cash, whose source is also hard to pin down.
Our money makers to secure this money in solid assets, buy land and houses, explaining Kampala’s property boom of recent years.
Personally I think this initiative is long overdue. URA’s overreliance on international trade to meet its targets was not going to be sustainable in the long run. Of course URA is one of the major beneficiaries of a depreciating shilling but that is a short sighted approach to taxes.
In order to become a middle income country by 2020 we must widen our tax base and rely more on income tax than import duties.
One benefit of taxation that is rarely discussed is its impact on a nation’s productivity.
Fortunately we have recent history to call on. In 2006 government scrapped graduated tax. The arguments that it was too expensive to collect and was regressive won the day. It also helped that it was an election year. When political expediency comes up against economic good sense, the former often wins the day, to the long term detriment of nations. Ask the US.
Five years down the line the fall out is a reduction of productivity, as villagers feel no compulsion to produce more than they eat and city youth with no incentive to work, resort to stone throwing as a welcome past time.
We forget why graduated tax was introduced. In order to get us to grow cash crops for British industry the colonial government introduced poll tax, payable by every able bodied man. The only way to get the money to pay the tax was to grow coffee, cotton or tea. That is how we became a big coffee and cotton growing nation. Do not believe that our forefathers grew these crops out of the goodness of their hearts.
Arguably we are unproductive because we are not taxed enough.
I know URA is going to come under a lot of heat from the urban elite to drop this initiative altogether and I will be impressed if the tax authority gets any overt political backing. But they are just scratching the surface in potential collections they can extract from the people.
For example we have a few landed families wallowing in poverty despite the square miles of land that have been passed down the generations. The land which is encumbered by unlawful occupants is a dead weight on both parties for the similar reason that neither can unlock the full potential of the land’s value.
In the west all landowners are taxed. The net effect of this is that as a land owner you need to make a choice, does it make financial sense to hold on to the land or not. If it doesn’t you sell it off to someone who can put it to productive use and pay the tax.
With this single move the supply of land in the market will increase lowering prices and increasing national productivity – since all land will be productive or at least more than is now.
And what will happen to the now landless masses? With their “new found wealth” the y can go and rent land or rent housing either way there will be more incentive to work.
This move will be even more politically explosive than what URA is currently implementing, but if we are serious about graduating into a first world country, these tough decisions have to be made yesterday.
As a country we are poor not for lack of resources but because we do not put our resources to optimal use. URA can help us with this by taxing everything that can be taxed, and when history is written the URA like the IRS in America, will be go down as having been a major driver of Uganda’s future prosperity.