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Better investment climate key to improved tax revenues in Uganda

The Uganda Revenue Authority (URA) has announced that the half year revenue performance for the financial year 2013/2014 has registered the largest ever deficit of USh 246.93 billion (Ugandan Shillings, equal to about US$ 99 million). This shortfall is considered to be at partial result of the tax collection methodology of the URA, and the consequences of the shortfall have made it difficult for the Uganda government to implement the national budget.

A Business Week article suggests that the revenue performance allows for insight into potential signs of deeper problems in the Ugandan economy, given that the root cause of the shortfall appears to be in the corporation taxes, rather than the perennially deficit international taxes. Allen Kagina, the Uganda Revenue Authority Commissioner General, has noted that a slowdown in the economy, and accompanying low access to credit, is partly to blame. However, the URA is optimistic that an improving economic situation, particularly the projected 6% GDP growth rate, will lead to improved revenue collections in the second half of the financial year 2013/2014. Nonetheless, there is pressure on the URA to capture more people into the taxpaying bracket, while also closing loopholes which threaten to widen the deficit.  Importantly, it is apparent that improving the investment climate is vital to stimulating domestic profitability and growth, and thereby staving off further corporate tax deficits.

Improving the investment climate means tackling governance issues

A key step to solving the tax deficit problem hinges on growing the private business sector of Uganda. This in turn, requires improving the investment climate, especially with foreign direct investment in mind. Such investment will lead to economic stimulation, while also serving as a significant means of creating employment.

As significant consideration in improving the Ugandan investment climate relates to ensuring good governance from both economic leaders and public sector officials. In the latter case, it is important to ensure that public resources are effectively channelled into sectors such as transport, health and education – which are all vital for facilitating and sustaining economic growth. Augustus Nuwagaba, an Associate Professor at Makerere University, has noted that there is a need for more tax education and more accountability from the government in how they spend the tax payers’ money.

A damning report by the Human Rights Watch and Yale Law School’s Allard K. Lowenstein International Human Rights Clinic in October 2013 illustrates the scale of the problem of corruption in Uganda. The 63-page report, entitled ‘Letting the Big Fish Swim: Failure to Prosecute High-Level Corruption in Uganda’ notes that no high-ranking government official, minister, or political appointee has ever served a prison sentence despite investigations into numerous corruption scandals over many years despite repeated pledges to eradicate corruption and good technical work from investigators and prosecutors. The report analysed officials’ use of legal loopholes and laws that “insulate political appointees from accountability to elude punishment.” The report concluded that a lack of political will has crippled Uganda’s anti-corruption institutions, undermining their efforts through a combination of political interference, harassment, and threats.

The 2013 edition of Transparency International’s Corruption Perceptions Index (CPI) has seen Uganda drop ten places from last year’s 130th position with a point’s score of 26 out of a possible 100. The CPI is an annual global aggregate catalogue that captures perceptions of corruption in the public sector based on a number of sources such as the World Bank, the Africa Development Bank, and the World Economic Forum. This drop is significant in terms of Uganda’s ability to attract foreign investment.

There is also need for a proper food security strategy, geared toward ensuring that food crops are produced without relying on rain fall patterns. Post-harvest handling and storage must be efficient—to ensure year-round food supply. The World Food Programme (WFP) published a Comprehensive Food Security and Vulnerability Analysis (CFSVA) on Uganda in April 2013 that noted the widespread poverty and food shortages faced by the country. The report noted that nearly a quarter of the population of the Ugandan population live below the poverty line, and as such, are extremely vulnerable to food security issues. Moreover, the report noted the impact of widespread malnutrition on the economy, particularly in the face of common droughts and food distribution problems. The report concludes that tackling food security is a multidimensional challenge requiring government input to tackle problems like healthcare and education which affect the rural population in particular. Government input on training, infrastructural investment for water and food distribution, and general assistance for alleviating the pressures of droughts is vital to improve Uganda’s food security situation. By improving food security, the government is also safeguarding sustainable economic development for the country – a vital component of the remedy sought by the URA.

The URA is confident in the short-term recovery measures, and has focused its efforts on strengthening collection methodology. However, the investment climate is ultimately the decider on whether domestic tax revenue targets can be plausibly met. Improving the investment climate through targeting corruption and food security are the key to Uganda’s recovery in this regard.

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