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