Government to introduce tax relief for companies

This raises difficult questions: Who are these companies and how did they qualify for these tax breaks?

Meanwhile, many local businesses continue to struggle with high loan interest rates averaging 18 percent. The situation is exacerbated by competition with the government for loans from local banks.

Ministry of Finance records show that the government has foregone Sh12 trillion in revenue over the past five years due to tax exemptions, averaging Sh2.4 trillion per year, or 1.59 percent of the country’s gross domestic product (GDP). The bulk of this lost revenue relates to VAT, corporate tax and customs duties.

Behind his clear, black-framed glasses and colorful cultural outfit, Fred Muhumuza, a Ugandan economist and former adviser to the Ministry of Finance, expresses skepticism about most companies that ask for government help.

“If a company doesn’t pay taxes, it’s probably not meeting other obligations either. These companies could get into trouble that they can’t save,” he says.

“You may also need to consider bank loans, unpaid suppliers and employees. If a company is not paying its taxes, you have to look closer and ask yourself: are we saving a viable company or are we just getting it off the government’s books? Often the government will write off such debts because some companies simply cannot recover,” he adds.

Tax incentives and exemptions are permissible under our national laws as set out in the Tax Procedure Act. Parliament recently considered granting them to the above-mentioned companies as the URA has been struggling to collect or recover these liabilities accumulated over time. Many are wondering why only these companies were chosen when the pandemic has hit the entire economy hard.

This has raised doubts about what other considerations the government is taking into account beyond legal requirements. This is particularly true because tax breaks are usually given to manufacturing companies to reduce the country’s import tariffs. Others are given to companies in which the government owns shares.

Others come when business owners turn to the finance minister or the tax authority and claim that they cannot pay their taxes due to a lack of profits.

Although tax incentives are enshrined in law, government audits show that these exemptions often fail to achieve their intended objectives. A key criterion for granting exemptions is job creation.

To qualify for these exemptions, a company must employ 70 percent Ugandans, including citizens of the East African Community (EAC), and source 70 percent of its raw materials from Uganda. However, these incentives usually only last for ten years.

But many economic experts, including the Auditor General, have occasionally warned about the effectiveness of such exemptions. And yet the beneficiaries are not even able to employ the required number of Ugandans.

The Auditor General’s report for 2022/2023, released in February, found that 22 of the 36 companies that received tax incentives failed to meet the required employment levels, raising serious concerns.

“Some businesses are heavily dependent on the health of their owners and many Ugandan businesses are struggling with internal structural problems. When the owner is absent, operations stall. We need to address governance issues, including succession planning and contingency plans,” says Muhumuza, who is also director of the Business Forum at Makerere University Business School.

“This also raises a crucial question for the URA and the government: how do we strengthen the tax base? The current mobilisation of domestic resources is like ‘going out to the lake to catch fish’ without ensuring that there are fish in the lake. We need to look at how we can support and stabilise tax-paying businesses to prevent their collapse,” he adds.

Parliament expressed concern that the URA is expected to collect Sh32 trillion in taxes this financial year for the national budget, which itself stands at Sh72 trillion. This represents a shortfall that coincides with the government’s plan to offer tax relief to certain taxpayers. This raises the question of how these two conflicting issues can be reconciled.

The government already has a ten-point program to reduce the budget deficit, contain the debt burden and increase government revenues. However, many economists fear that this goal is unlikely to be achieved if the decision to forego government revenues is not justified and based on merit.

There are also tax changes in the 2024/2025 tax year that offer companies the opportunity to pay off their principal tax debts while waiving interest and penalties. The Ministry of Finance announced this to encourage vulnerable institutions to take advantage of this opportunity, which has been in place since the 2023/2024 tax year, to reduce their mounting tax debts. The scheme was extended from July to December.

There are suggestions that the government should rethink its approach to supporting private businesses beyond mere tax exemptions. This is because the more businesses that qualify for tax relief, the more revenue losses it causes, which become unsustainable. Dr Muhumuza suggests that the focus should be on understanding why businesses struggle to generate revenue and pay taxes, rather than simply granting tax exemptions. He adds that before granting tax relief, the Treasury should weigh up the costs and benefits to the state, as these are mostly designed to attract foreign direct investment. But these, he tells Sunday Monitor, must deliver tangible benefits.

“People say they are contributing to job creation, contributing to economic growth, but sometimes the target is not yet achieved and the jobs we are looking for have to be quantified. So you are giving up 10 billion shillings in tax revenue from a foreign investor and then they come and create 20 to 30 jobs, or even if they create 100 jobs, they only pay these people 150,000 shillings. So there is a big discrepancy,” he notes.

“So if you want to focus on other things, you ask yourself, ‘Are they providing the service that will benefit the others who use it?’ If you don’t, the tax exemptions can often lead to losses. And some of the taxes these companies pay may not be a reason to choose a country,” he adds.

The economist explains that many companies focus on factors beyond tax exemptions. In Uganda, for example, taxes are only paid when a company makes a profit, and yet investors worldwide are more interested in profitability than tax exemptions for companies. The government needs to create a system that allows investors to make profits, he says, adding that a company that cannot pay taxes within three years does not legally owe anything.

“Remember, you borrowed money to create a favorable environment, and you tell your donors you’re borrowing money to attract investors, tax them and then pay them back. Now you’ve borrowed money, you’ve invested and you say you’re not going to pay taxes. How are you going to pay back your loan? So we need to look for more important reasons than thinking that tax exemptions will fix everything,” he says.

Ramathan Ggoobi, Permanent Secretary in the Ministry of Finance and Permanent Secretary in the Ministry of Finance, was previously quoted as saying: “His ministry has released the cost-benefit analysis of the tax incentives but it is yet to quantify the benefits to find out whether the incentives have given us increased revenue or reduced revenue.” Muhumuza believes that the government should be very careful about what kind of success it prefers. For example, he points out, when a new company makes medicines more accessible, the population benefits.

“So some of the benefits are hidden and potentially illegal in law,” he says. “If you follow the law, some of these benefits may look illegal, but in the normal sense they are acceptable,” he adds, saying that cost-benefit analysis is a very delicate process.

According to his proposal, the government should closely examine the business plan and management of a company if it wants to get a tax exemption. If the company does not want to recognize its right to privacy regarding such information and intentionally invades public resources, it should be turned away.

“We don’t want companies that make promises. […] Companies should open up and be transparent. We need to know who is running the company because it has been shown that some are dependent on the financial health of the owner, which is not sustainable,” he says.

Uganda has already lost Sh30 billion in unpaid taxes from the judiciary, Sh638 billion to legislators and Sh36.16 billion in compensation for contract terminations.

In addition, according to the Ministry of Finance, private pension schemes are missing out on up to Sh666 billion in revenue. The public is now waiting for Ggoobi’s assessment of the returns from these tax exemptions to determine whether the country is on a positive economic trajectory or paying a heavy price for the Ministry of Finance’s failures.

The controversy surrounding Uganda’s tax exemptions highlights a deeper conflict within the country’s fiscal policy: the need to attract investment versus the need to generate revenue. As the government continues to forego billions in taxes, the crucial question remains: do these incentives really benefit the nation or do they only enrich a few?