I have been prompted to write on the above subject after reading a report on 'Taxation and the growth of Mobile in East Africa, establishing tax regimes that recognise mobile phones as a necessity not a luxury' which a reader of my articles sent to me and the related version on the internet, 'In East Africa, Cutting Mobile Taxes Today Would Boost Government Revenues Tomorrow'.

According to a study by a consultancy firm Deloitte, for the GSM Association, the global trade association for mobile phone operators, in collaboration with GSM Africa, if the governments in Uganda, Tanzania and Kenya were to cut mobile phone taxes today, the study found that their total tax receipts would actually rise in the medium and long term.

East Africans pay taxes of between 25% and 30% on mobile phone services, compared to an average of 17% in the rest of Africa. The study reasons that a cut in mobile phone service taxes would lead to a reduction in tariffs, which would then boost usage of mobile services. Greater usage of mobile phones improves communication between businesses and their customers, fuelling economic development and lifting tax receipts from across the wider economy.

Whereas the above findings could be easily challenged by policy makers, it is important that East African governments consider the effect of high tax rates on their economies. To give more weight to the above findings, further reference is made to the repor: Tax Rates, Tax Revenue and Economic Growth by Gerald W. Scully, National Centre for Policy Analysis (NCPA) Policy Report No. 98, March 1991.

According to the report '...This study investigates the international relationship between tax rates and tax revenues. Based on an econometric analysis of taxes in 103 countries, we conclude that: ...If governments try to take a larger share of private sector income, the tax base will shrink so much that total tax collections will actually go down...'

The findings of the above study give credence to the findings of the study by Deloitte as highlighted above. The reasons given in the report for the above trend are as highlighted below:

'...Even where there is a positive relationship between tax rates and government revenue, the tax base changes when tax rates change. For example, the wealthy have enormous discretion over how, when and whether to realise income. At high tax rates, they can convert taxable income into fringe benefits or other business expenses. High tax rates cause people to work less, save less and invest less as well.

"In Peru, almost half the population works in the informal sector, producing 38 percent of Peru's GDP."

High tax rates also affect the tax base for the not-so-rich. In the presence of high tax rates, people increasingly conduct their economic activities in the "underground," "black market" or "informal" sector of the economy- where they escape official scrutiny and costly government regulations as well as high taxes.

The above findings are in agreement with the reasons that have been given for the persistent smuggling in Uganda. It has been pointed out that due to high tax rates on most imports, the benefits of smuggling are considered so enormous that it is tempting for smugglers to continue the bad practice despite the surveillance efforts of URA. It further escalates the cost of tax administration due to high surveillance and enforcement costs as has been the case in Uganda.

In conclusion, there is an inverse relationship between tax rates and tax revenue and governments that would like to realise higher tax revenues in the medium and long term should work towards reducing tax rates now. However, we have been witnessing increasing tax rates, while the government is pursuing short term revenue maximisation objectives.

For instance, VAT rate was increased from 17% to 18%, Excise duty on mobile phones from 10% to 12%, Local Withholding Tax from 4% to 6%, etc. This approach has serious negative consequences overtime and ultimately leads to a shrinking economy. Therefore as Dr Suruma prepares to present the budget proposals before parliament and before MPs pass the budget, efforts should be made to scrutinise the tax rates which are currently high, especially in view of the above research findings.

The writer is a member of Monitor Panel of Experts and a tax consultant at Q-Sourcing.