This chapter was prepared by Edgardo Ruggiero.
An independent Uganda Revenue Authority (URA) had been established in 1991.
The noticeable revenue increase in 1994/95 was due to the coffee boom. To cushion the impact of the unexpected rise in the world market price of coffee on macroeconomic aggregates, including domestic demand and the exchange rate, the authorities introduced a coffee stabilization tax, which remained in effect for two years.
This rate structure is indicative and has important exceptions, including zero-rated items such as farm inputs and health and educational goods.
This temporary measure was allowed under COMESA agreements. “The COMESA Council of Ministers agreed that according to the Treaty, member states who may suffer revenue losses or whose industrialization program will greatly suffer as a result of effecting tariff reductions, may impose surtaxes for specified periods on commodities from another member state.” (Government of Uganda, 1996/97 Budget Speech (Kampala: Ministry of Finance, Planning and Economic Development, para. 67). In this context, beginning in July 1996, excises of 10 percent, 20 percent, and 25 percent were imposed on selected imports. In 1998/99, most goods were taxed at 10 percent, and only few goods at 20 percent. However, through statutory instruments, the valuation of some sensitive imports—i.e., textiles and sugar—was artificially raised to discourage importation.
The importance of tightening Section 22 goes beyond import duties, as it allowed any investor licensed by the UIA to import capital inputs free of sales tax, import duty, excise duty, import commission, and withholding tax. In fact, the termination of the discriminatory exemptions under Section 22 was impossible to implement until 1996/97, as most investors that had been promised or had received certificates of exemption were grandfathered for one year through transitional provisions.
However, the 1998/99 budget law introduced the possibility that the URA Commissioner General could notify the Minister of Finance of cases where the VAT could not be effectively recovered, by reason of the taxpayer’s hardship or the impossibility, undue difficulty, or excessive cost of recovery. In such cases, the Minister may grant a full or partial tax write-off.
Under the existing organization, the operational branch of URA is subdivided in departments for each main revenue head (VAT, Internal Revenue, and Customs and Excises), with little communication among them. This organization is a carryover from British practice and was appropriate when the main revenue sources were based on trade and relatively simple indirect taxes (i.e., excises and one-stage sales taxes) and no computerization and little automation existed. Furthermore, within each department, the lack of functional organization hampers specialization and efficiency. For example, tax auditors often double as tax collectors. Furthermore, there is no distinction between collection of current and overdue liabilities. The organization is changing with the establishment of the Large-Taxpayers Department (LTD) in November 1998 (see below).
See Section I of International Monetary Fund, Uganda—Selected Issues and Statistical Appendix, IMF Staff Country Report No. 98/61 (Washington. International Monetary Fund, 1998) for further details on administrative changes in 1996/97. This section of the chapter updates the 1998 report to take account of subsequent events and additional findings.
Penalties and interest payments are not yet rigorously applied and are sometime used as a bargaining tool to negotiate collection of overdue taxes.
For example, VENUS cannot provide reliable refund or estimated arrears positions of taxpayers, nor automatically calculate penalties.
Although the relevance of the LTD goes well beyond the VAT, its implementation is discussed here because it forced the VAT Department to focus its collection and audit efforts on medium-sized enterprises. In the past, in order to achieve its collection objectives, the URA departments would concentrate excessively on a few large taxpayers—a strategy that often generated accusations of harassment by the few targeted taxpayers.
Outside the LTD, the VAT taxpayer is currently required to (i) submit a return at the tax office; (ii) make its payment at the bank; and (iii) return to the tax office to pick up a receipt. With direct banking procedures, the bank will issue a tax payment receipt upon reception of the payment and tax return.
The VAT productivity is calculated as the ratio of the VAT collection as a percentage of GDP to the VAT rate (17 percent in Uganda) and represents how many hundredths of a percentage point of GDP are collected for each point of the tax rate.
Notwithstanding comparable levels of GDP per capita, Kenya has higher VAT productivity (0.35 percentage points of GDP). Zambia also has a higher VAT productivity (0.29 percentage points of GDP), although its GDP per capita is lower than Uganda’s. VAT productivity in Uganda may be hindered by the relatively small formal manufacturing and trading sectors. If Uganda’s VAT were at Zambia’s level, VAT collection would be about 4.9 percent of GDP—i.e., 1.1 percent of GDP higher than currently.
Owing to initial resistance by manufacturers and the need to clarify procedures, the Income Tax Act was enacted only in December 1997.
The old law did not include any provision for taxing capital gains.
Exempt institutions are only those identified in Schedule 1 of the Income Tax Act—essentially UN and donor agencies—and any other entity exempted in writing by the Minister of Finance before the enactment of the act on December 31, 1997.
For a review of civil service and salary reform see Section II of International Monetary Fund, Selected Issues and Statistical Appendix.