Tuesday, June 10, 2014

THE BUDGET: TAKE CARE OF THE CENTS AND THE SHILLINGS WILL TAKE CARE OF THEMSELVES



This week Finance minister Maria Kiwanuka will be reading the budget to the nation.

It’s been a hard year but we heard during the state of the nation address last week that economic growth would come in marginally lower than it did last year at 5.7%. This year’s growth was driven mainly by mining, cash crops, informal manufacturing and trade.

The budget, an account of the how the government will spend and what plans it has to raise the money to spend, serves as an x-ray of what government priorities are, forget the rhetoric.

Uganda currently collects taxes amounting to about 12% of GDP. A low figure when viewed against the Sub Saharan Africa average of 16% or even against Rwanda which has just managed 15%.

The government has almost exhausted all the taxes it can levy any new announcements will just be variations on the existing regime.

The challenge of course is to collect all the taxes due to government from all those people or companies liable. A handful of people – mostly employees are shouldering the bulk of the tax burden.

So the trick is to widen the tax base – rope more people into the loop to spread the pain more evenly and of course collect more tax.

This is easier said than done.

Observers estimate that as much as 70% of our economy is in the informal sector, that is a lot of our economic output is generated by unregistered entities or individuals. This would not be a problem were it not for the fact that these informal operations put a ceiling on the potential of these entities and by extension the economy.

It has been argued that the cost of going formal serves as a disincentive to small businessmen, who while they may appreciate the benefits of going formal just can’t be bothered to go through the paperwork of going formal or subject themselves to the discipline to maintain the formality of their business.

Attempts to centralise set up requirements with the Registration Bureau Services is a step in the right direction.

In addition a two-year old initiative to enforce a law which for the purchase of an asset of more than sh50m a clean bill of health should be shown is a welcome innovation.

But when we talk about people meeting their tax obligations, while the informality of our economy is a problem, the amount of tax evasion even by the most respectable firms and individuals is worrying.

They are involved in creative accounting to under declare incomes or employing “higher ups” to prevent URA chasing them down for their just dues.

The latter cases are really cases of indiscipline by the higher ups and should be reported and handled administratively however in the former case we can go a long way to plugging this loophole by inserting in existing laws to two clauses.

The first being that returns should only be filed using accounts audited by credible firms and secondly, a law should be enacted that any accountant found abetting tax evasion should be disciplined to the extent of removing them from accountants roll.

One accountant hazarded that these two initiatives alone may be good for at least another two percentage points on our tax-to-GDP ratio.

In addition this would level the playing field for businesses.

As it is now legitimate businessmen are suffering because less scrupulous individuals are not being taxed properly, using this “free” cash to expand more rapidly and undercut the competition. This kind of underhand practices can have the effect of concentrating sectors in a few hands, reducing competition and its attendant benefits, which affects not only the government in lost taxes, but also employees who would be paid less than their rightful due, suppliers who will be stuck with a few clients and therefore lose their own bargain power and customers who will be stuck with no variety and poor quality goods and services.

And it is already happening.

It’s within the minister’s power on Thursday to suggest such additions to the income tax act.

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