TAX NEWS - JUNE 2010

Uganda Tax: Government to improve tax collection

Uganda Government is expected to focus on improving enforcement and tax collection next financial year as it struggles to deal with the declining donor flows.

Uganda has traditionally relied on donor financing to plug its budget deficit, but this is projected to decline to 27% in the 2010/2011 financial year, from 32%.

This is against a background of continued failure to hit targeted revenue collections. A sh88.9b shortfall is expected this year due to weak trade-tax performance. The poor tax collections have been blamed on lower economic growth, lower imports and low compliance by tax-payers.

However, analysts say the effect of poor revenue collections will be offset by huge sums of money that was not spent due to weakness in investment planning and new procurement procedures.

The Government is also not expected to introduce new taxes, but to concentrate on plugging the loopholes in tax administration.

The revenue shortfall comes at a time when the East African Community's Common Market protocol takes effect on July 1.

This will affect the economy in cross-border trade, taxation, location of industries and investments, competitiveness of the various sectors, fiscal and monetary policies and attraction of both local and foreign investors.

This creates the need to invest in productivity-enhancing sectors to reduce the cost of doing business, as Ugandan firms face increased competition.

Tax experts say as the five countries' merge markets, they should strive to remove obstacles.

"Different levels of taxation in the member states can easily become an obstacle to trade within the common market.

"If different taxes are levied on a different basis or at different rates across the region, this can be an obstacle to the free movement of goods, capital, labour and services within the region, says Francis Kamulegeya, a tax partner at PricewaterhouseCoopers.

Kamulegeya reckons that a harmonised tax system was necessary to create a tax environment that does not create distortions within the EAC.

"It will be necessary to create a harmonised system of taxation, covering turnover taxes such as Value Added Tax (VAT), excise duties and other forms of indirect taxes. This will ensure that the common market functions well."

This, he said, was the reason tax harmonisation was high on the agenda of the EAC member states.

Kamulegeya explains that tax harmonisation does not mean uniform and same tax laws, tax bases and tax rates in the five countries.

"That is not necessary because it is not practical," he says.