The World Bank wants government to review tax holidays and exemptions because they have failed to deliver the promised investment boom.
Speaking at the 25th Uganda Economic Update in Kampala yesterday, Mr Qimiao Fan, the World Bank East Africa regional director, said with more than 600,000 new labour market entrants each year before 2030 and at least one million annually by 2040, Uganda must seek ways to mobilise more domestic revenue by broadening the base.
This, he said, could be done through closing loopholes and ensuring that high-net-worth individuals and large firms contribute fairly, as well as ‘reconsidering exemptions that erode the base and shift the burden to a shrinking pool of compliant taxpayers’.
World Bank economist Silver Namunane, on the other hand, said that whereas generous tax exemptions and the 10-year tax holiday were intended to stimulate new investments or reinvestments by large firms, this has not succeeded in fostering growth in firms’ fixed assets’.
‘Beneficiaries’ depreciation allowances are 2.6 to 3.3 times higher compared to group firms, indicating that benefiting firms are more likely to replace worn-out assembly lines or add minimal infrastructure rather than significantly expand assets,’ he said.
The 2023/24 Tax Expenditures Report estimates total revenue foregone in tax holidays and exemptions at Shs3.6 trillion, about 1.78 percent of gross domestic product and 13 percent of total tax revenues of Shs27.3 trillion.
Customs duty accounted for the largest share of Shs1.137 trillion, 32 percent of total tax expenditures, while foregone value added tax dropped from Shs1.113 trillion (0.61 percent of gross domestic product) in the 2022/23 financial year to Shs677b (0.34 percent) in the 2023/24 financial year.
Over the years, Finance Ministry data shows, between 2018 and 2023, total tax expenditures rose from Shs2.079 trillion to Shs2.972 trillion, but stayed broadly flat as a share of gross domestic product. While responding to the World Bank proposal, government signalled willingness to adjust but favoured calibration over abrupt repeal.
Acting Ministry of Finance Permanent Secretary and Secretary Treasury Patrick Ocailap, said government needed to ‘broaden the tax base instead of increasing taxes on the people of Uganda, highlighting the need to conduct a cost-benefit analysis of the tax reforms.
‘Rather than eliminate the 10-year tax holiday, we should closely monitor their activities and have a sunset clause for each’, he said.
The World Bank wants Uganda to tighten or scale back exemptions and holidays that are costing between 1.6 and 2 percent of gross domestic product per annum, while delivering limited investment gains.