Last week parliament waived taxes all income taxes on Savings & Credit Cooperative Societies (SACCOS)for the next ten years starting with the next financial years as a way to encourage savings .
As it is now SACCOS pay 15 percent withholding tax on interest earned from savings and on dividends.
Raising savings rate is important for our national development ambitions.
According to the World Bank our bank deposits to GDP stand at about 17 percent of GDP in 2014 (the most recent figure they have on their website) Kenya stands at 44 percent, South Africa at 58 percent and Mauritius at 92 percent.
"The more money we have flowing through the formal financial sector the better for the economy. With increased savings we can have lower lending rates and more and more money can find its way to the more productive sectors of the economy...
It has been pointed out that its not true that we don’t save, its just that we save in different ways by buying land, livestock and other non-financial assets. The challenge with this kind of saving is that it locks resources down making them unavailable to the owner or anybody else and to that extent slowing down the development process.
The formula financial sector serves as the middleman between the savers and the borrowers. SO while you have no use for your savings if they are placed in a bank rather than under your mattress, those funds can support others with ongoing projects.
The other argument is that our incomes are low and the cost of living is rising every year leaving us nothing leftover to save.
Experience has shown that is not true. When the New Vision SACCOS was started in 2005 the minimum monthly saving required of members was sh40,000, even the highest paid members grumbled initially about the figure. Today a decade or so later members who did not have two coins to rub together can of millions of shillings in savings.
"This goes to show that the reason our savings rate are low as a nation is for lack of adequate avenues to save. This has been proven time and time again...
The bank accounts in existence currently are more than five million but there are at least 21 million mobile money accounts across all platforms today. It has taken the industry less than a decade to catch up and overtake the banking industry because of their convenience.
As an intermediary between the people and the formal financial sector SACCOS are arguably the next best thing. A well run SACCOs industry can be key in mopping up the billions that the banks are unable or unwilling to go after especially in the rural areas.
Whereas the tax relief is most welcome it is not the solution to the reported collapse of SACCOS. In fact I believe a tax waiver will make SACCOS more vulnerable to collapse than before.
This is why. First of all I would be surprised if even a tenth of all the 3000-plus SACCOS in Uganda pay any tax. For those that have been paying tax the waiver may serve as a windfall and how the SACCOS managements decide to deploy these windfalls may very well lead to their down fall.
In the absence of good strategic processes this windfall may go towards introducing perks for management, raising expenses, accumulating new liabilities and investing in assets that do not support the group’s core purpose.
Remember it’s a ten year tax holiday, if unnecessary expenses are accumulated when the taxation resumes cash flows will be severely affected and trouble will begin.
SACCOS will do best to remember that there are only two ways to spend money to invest or to consume. During this moratorium they should be best advised to beef up their balance sheets rather than increase their expenditures.
The New Vision SACCOS last year paid more than Sh100m in corporate tax, a figure that has been growing by about 14 percent over the last several years every year. And you are not counting PAYE and withholding tax on interest and dividends.
"While we are grateful for the relief a more sensible thing would have been to lower the tax rates for SACCOS, say to 15 percent even five percent during the next ten years. The idea being that the discipline of paying taxes would be maintained....
I can imagine that there will be a struggle to jump start tax compliance come 2017.
But while we are still on the subject of raising why not also raise the amount of mandatory savings workers make to NSSF? Say they match employers contribution of 10 percent of income?