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Day March 11, 2015

SMART TAXATION CONCEPT TO STIMULATE THE ECONOMY(PART 2)


In September 2013 I assessed losses due to drought suffered by over 250 maize farmers insured by AIG in Kiryandongo District. The claim settlement (of a 9 digit figure in Ugandan shillings) paid by AIG made the farmers promise to continue borrowing from ECLOF Microfinance (that had insured their agricultural production loans). This experience convinced me that a new taxation concept modeled on these farmers’ income might stimulate the economy by creating employment to over 60% Ugandans in the agricultural value chain.
This new taxation concept aims at leveling the (playing field) cost of doing business by abolishing tax holidays, VAT, withholding tax (W/T), stamp and import duties. (Using this new taxation model) the Government (GoU) would enact laws taxing (companies, individuals) at say 10% deductible on bankable income (credited to URA) by the tax payer’s bank. Only excise duty would be paid on specific goods requested for by (local) industries that need protection and on items posing health risks.

The 20% (economic activity) contribution to GDP from agriculture to have bankable income would require a policy in agricultural insurance whose premium would be paid by GoU; farmers would, thereafter, qualify for agricultural production loans from financial institutions – resulting in their bankable incomes from agriculture to be taxed by 10% (without e-tax returns filed by less than 5% of Uganda’s population connected to the internet). A premium of UShs 150 billion (Nakasero market compensation??) paid by GoU to insurers (for agricultural insurance and perils such as drought) at a premium rate of 0.5% would stimulate the economy by UShs 30 trillion (agricultural production loans). However, a 3% premium (Kiryandongo farmers’ rate) stimulates the economy by UShs 5 trillion; for 10% of the above premium (UShs 15 billion) given to insurers, the economy would still be kick-started by (between) UShs 3 trillion (and 500 billion) in the agricultural sector alone as banks and insurance companies compete to absorb the premiums. The multiplier effect (of agricultural value-chain industries) would create more employment.

URA would narrow its scope of operations to only audit banks for the 10% taxes deducted from bankable income; filing tax returns would become unnecessary business expense; payment of corporation tax would enable acquisition of Tax Clearances for loans and forex transactions. By using a cashless (mobile money economy) from a tax base of 15 million accounts each earning UShs 300,000 (monthly income) GoU can collect UShs 5.4 trillion annually before the 10% taxation (bankable income) from other sectors. 

To enforce opening of bank accounts (for the automatic 10% taxation) for those keeping sacks of money at home, new currency notes would be introduced (offered only through bank accounts); any financial transactions made to mop-up (money sacks) liquidity would (additionally) stimulate the economy. In addition to tracking embezzlement (and money laundering) during the 10% taxation (for onward investigation by IGG), banks and GoU would design more (cashless) services using ATMs.

The current punitive taxes (based on gut feeling, suspicion or perception of the tax authorities) such as VAT, W/T and Import Duty (paid before earning!) would be replaced with (real) taxes paid after being earned. Uganda would become competitive to do business in (a Duty Free zone – ‘Dubai’ of the Great Lakes region).

The current taxation model (since VAT was introduced 20 years ago) of doing the same thing over and over again has stifled expansion and sustainability of the same small business community; whereas the above taxation model reinforced by a policy in agricultural insurance needing further debate and consideration by a People’s 2016 Manifesto might offer probable Plan B to our economy.

Once again “The country needs to make difficult economic policy decisions to restructure the economy rather than leaving the global and local market forces to do the wild and uncoordinated restructuring” as Dr. Fred Muhumuza, a Senior Manager at KPMG Uganda said.

By: Dafala Khalil

“SMART TAXATION CONCEPT TO STIMULATE THE ECONOMY


When the fragile Uganda shilling hit the lowest 3000 mark against the dollar on Tuesday, 10th March 2015 I was forced to hurriedly edit the above concept to offer probable Plan B to our economy as part of the People’s 2016 Manifesto series anyone can contribute to in order to influence policy changes in manifestos of political parties. This scenario of a shortfall on the economy’s inability to generate sufficient economic activities was predicted by Mr. Muhammed Ssempijja of Ernst & Young (Tax Partner) in the Daily Monitor of Monday, 29th December 2014 when he explained that “The economic environment is not attracting and retaining enough investments. This means that the tax base is not expanding because there are fewer players.” Of course needless to say is that the economy depends on imports rather than exports.

Over-taxation stifled business growth and made EU countries uncompetitive that finally forced firms to relocate (jobs) to Asian countries. The Daily Monitor of 22nd September 2014 echoed something similar, “AVOID WESTERN TAX MODELS – EXPERTS” summarized by Action Aid International chairperson Irene Ovonji Odida as “Western models are said to be unfavorable to developing countries like Uganda”. President Museveni was even spot on when he made Uganda Revenue Authority (URA) waive taxes on building materials for Nakasero Apartments owned by a Somali business-woman. Therefore, in view of the foregoing it seems Uganda must ‘invent the wheel’ in taxation by striking a balance between collecting taxes and stimulating the economy without copying IMF and World Bank policies.

On 4th February 2015 traders within Kajjansi on Entebbe Road were visited door to door by URA demanding payment of taxes; by coincidence there had been an article in Daily Monitor of that same day, written by Kyetume Kasanga titled “Private schools should pay the 30 per cent tax without increasing fees”. Analysis of the above unsustainable method used by URA to collect taxes in this dot com era proved to me that URA needed to re-invent a taxation model probably similar to the attached concept for further debate. Four examples will serve to explain the need for a new taxation methodology in this era: –

1.Walk into any down town city shopping mall in Kampala; are you convinced that URA collected taxes (on every item you see being sold in that mall) at importation or from its local factory here? If your conscience says no, then who is fooling who or what other taxation model can be used?

2.As (only?) Kampala is opening up to all the unplanned development (with suburbs such as Kibumbiro, Kasokoso or Kikubamutwe), will it be KCCA or URA to reach out to collect taxes (the Kajjansi way?) from such undeveloped areas (including from private schools suggested by Kyetume Kasanga) without endangering the lives of the revenue collection staff? Just recently in Kenya, school children fought off an ‘investor’ who had taken over their playing field in this global village of children’s rights.

3.Dr. Fred Muhumuza, a Senior Manager at KPMG Uganda wrote in the New Vision of 9th February 2015 ‘Explaining the current shilling depreciation’ that Uganda “The country needs to make difficult economic policy decisions to restructure the economy rather than leaving the global and local market forces to do the wild and uncoordinated restructuring”.

4.Winnie Byanyima’s article in the Daily Monitor of Tuesday, 3rd February 2015 on “Revise Corporate Tax Rules to close wealth gap” argued on behalf of Oxfam International that there needs to be a global tax reform to redistribute global wealth; her BBC radio debate titled “A richer world but for whom” aired on 25th January 2015 completed her argument.

The answer to the above scenarios is, “do not use yesterday’s solutions for today’s problems” in the collection of taxes and restructuring the economy; my ideas in the attached taxation concept have a Ugandan context which could thereafter be used to engage and lobby the Ministry of Finance.

The key questions this ‘new’ taxation concept will try to address are: –

• The current taxation system stifles growth of businesses that finally go under; an overhaul needs to be undertaken which unfortunately the elite and politicians might be slow to accept as they are the direct beneficiaries of the current system and/or enslaved by IMF and World Bank policies.
• A good taxation system should not tax any business before sales; in the Ugandan context most businessmen lose an average of two (2) weeks for each consignment imported as they are caught between URA and looking for money to pay taxes (losing about two months annually).
• Real value for money (i.e., taxes) is not sometimes realized as tax evasion, undervaluation and/or overvaluation takes place with connivance of clearing agents thus creating unfair business climate.
• The 18% VAT; 25% Import Duty; 6% Withholding Tax makes Ugandan products become very expensive.
• The above tax percentages remain high because widening the tax base has been left to URA alone who always retains the high percentages over the same small business community thus ending up stifling the expansion and sustainability of this same small business community.

The (attached) taxation concept also offers a very simple model with very fair sustainable percentages; collected at source (banks); easy to audit by URA, Bank of Uganda and Auditor General; removes all bureaucracy of assessment and filing of returns; widens the tax bracket by bringing on board the more than 50% (unbanked and untaxed) farmer populations using Oxfam’s model termed “Even It Up” of using public financing (in this tax model) for agricultural insurance; which triggers expansion and stimulation of the (insurance and) agricultural supply chain to create employment; catches up with corruption and embezzlement of public funds by exposing such culprits to the IGG directly from their bank accounts; and might in the long term check money laundering.

The conclusion to be drawn from the taxation concept presented is that maximizing on tax collections alone (even at times when URA surpasses their own targets in the hardest of times) strangles the economy. Please have a nice reading.

DAFALA KHALIL

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