14 June 2017

Uganda: Tax Holidays - How Does the Economy Benefit?

Photo: Daily Monitor
Ugandan shillings.
analysis

Kampala — Government has been under scrutiny due to payment of Shs77b for several companies after they were granted tax exemptions in the last financial year.

As a requirement of Parliamentary procedure, all exemptions have to be disclosed and approved.

The payments on behalf of these companies, for some, are being considered as a loss of revenue to the government.

Members of Parliament on the Budget Committee protested when the government brought a new set of incentives and extensions of some tax holidays to investors.

Mr Richard Otieno-Okoth, the MP West Budama North, Tororo District, was specifically critical of the corporation tax exemptions given to companies that are already making profits.

"A company is already making a profit and now we are rewarding them with an exemption. Exemptions should be for struggling companies," he said.

There are currently 22 companies that have running tax exemptions and those that are renewed every financial year.

Bidco, Roofings, Cipla, Steel and Tube, Vinci Coffee, Liao Shen Industrial Park and ASB Group of Companies are exempt from corporation income tax.

Another 13 companies are not charged import duty or VAT.

For Mr David Bahati, the State minister for Finance, government has to attract investment, and incentives provide that.

"We are in this to promote investment. That is very important because the support for the economy is key for our children to get jobs and achieve the Vision 2040 and we are doing it in a transparent and more accountable way since the money is appropriated by Parliament," he said while tabling a new set of proposals.

President Museveni has also been a proponent of exemptions.

In 2016, he argued that corporation tax should even be reduced from 30 per cent to 15 per cent for companies involved in production.

"The tax policy; especially taxing production. Corporation tax, Value Added Tax - although it is a consumption tax, it affects production. You find that we have got high corporation tax of 30 per cent. My economists say, don't worry, we only tax you when you make profits. That is very good, but if you didn't tax me, wouldn't I transform more. And how about the one who taxes less, is he not going to attract more investors than you who is taxing more?" he said in August 2016 at Bank of Uganda's celebration to mark 50 years.

Civil society groups have also not spared the government that grants tax exemptions.

Recently, Tax Justice Alliance Uganda pointed out that from their research, that exemptions "can promote investment in the country if they are transparent and equitably accessed."

"Government owes it to Ugandans to explain to them and help them understand how the tax exemptions are going to benefit them and the economy. There is too much politicking in the awarding of tax exemptions; which affects the awarding of tax exemptions on merit," said Mr Julius Mukunda, the coordinator at the Civil Society Budget Advocacy Group (CSBAG), which is part of the Tax Justice Alliance Uganda.

The alliance wants the government, through the Office of the Auditor General to carry out a cost-benefit analysis of tax exemptions to the economy.

This, they argue, would justify whether they should exist or not.

Benefits

Ms Joanita Nakimuli, an associate director in Tax at PwC, points out that the Ugandan economy has benefitted from some incentives.

"One of the main incentives that attracted the Bujagali investors to come in and help Government with the hitherto failed dam project were the tax incentives provided to the company, which included import duty and VAT exemptions during construction, and corporate tax, which would have formed part of the tariff charged to Uganda Electricity Transmission Company Limited.

If these tax incentives were not provided in the first place, it is highly possible that we would not have Bujagali, which would have arguably been a much worse position from an economic effectiveness and production capacity perspective," she told Daily Monitor.

Ms Nakimuli also points to other examples like the significant reduction excise duty tax incentive on beers that are made from locally grown crops.

This has generated a ready market for sorghum and barley farmers in the Teso and Sebei regions respectively.

She does, however, admit that there are challenges too.

"However, there are also equally other examples where tax incentives result in negative impact and loss of revenue to the Government and the nation. This is especially so where the tax incentives are misused and abused.

"In such cases, it is possible that the tax incentive has not been carefully thought out and planned, has been granted to the wrong entity/sector, has not been implemented correctly or has not been granted in a clear and transparent manner," she adds.

The discussion around incentives, according to Mr Mukunda, should be on a case by case basis so that the benefits are well documented.

Power prices

Bujagali was granted a five-year renewable corporation tax exemption, after approval from the MPs. Notably, if the exemption was not granted, electricity, which is already highly priced, generated from Bujagali would have gone up from $11 cents PKWh to $13.5 cents and north of $14 cents.

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