The Minister of Finance recently unveiled an ambitious budget of UGX 72 trillion, themed ‘Full Monetisation of Uganda’s Economy through Commercial Agriculture, Industrialisation, Expanding and Broadening Services, Digital Transformation and Market Access’.
The minister reported a positive economic outlook from the financial year (FY) 2023/ 2024, highlighting a 6% growth in the economy, up from last financial year’s growth of 5.3%. This economic growth has been attributed to growth in sectors such as manufacturing, construction, mining and agriculture. Other positive attributes point to stability in the exchange rate that has spurred investment, a reduction in inflation and export promotion for Uganda’s agricultural and industrial products.
The budget is projected to be financed through debt (55%) and domestic revenue 45%. This has seen Uganda Revenue Authority’s (URA) collection target move up from Ushs 29 trillion in the current financial year to Ushs 32 trillion.
The increase in the domestic revenue target comes at a time when the taxman has reported collections of 77% (Ushs 24 trillion) as at end of May 2024, with only one month to the end of the financial year. The increased target is likely to see the taxman take on more aggressive measures to enforce tax compliance.
A few tax measures have been introduced to boost tax revenue collections. Some of these include: The proposed increase of excise duty on petrol and diesel by Ushs. 100, the repeal of exemption of VAT on importation of software and equipment installation services by manufactures; Introduction of excise duty on construction materials such as adhesives, grout, white cement and lime, as well as introduction of a 0.5% excise duty on withdrawals through payment systems.
Government has also introduced a measure that focuses on strengthening the mechanism that allows the automatic exchange of information with tax authorities in other countries. This is expected to have a major impact through the disclosure of taxpayers’ offshore income and assets that may have previously been outside the URA’s radar.
In addition to these new measures, we expect to see the tax authority close in on tax revenue leakages through technology solutions such as the Electronic Fiscal Reporting and Invoicing Solution (“EFRIS) and the Digital Tax Stamps (“DTS”). In the third quarter of FY 2023, we saw an increased URA scrutiny of traders’ businesses across the country with respect to the use of EFRIS, with the resultant protests that ensued. The underlying issues are yet to be fully resolved. Taxpayers are likely to see more stringent penalties for failure to adhere to the utilisation of these systems going forward.
Government has also proposed the re-introduction for waiver of interest and penalties outstanding as at 30 June 2023 if the principal tax is paid by 31 December 2024. This is an opportunity that taxpayers need to take advantage of. This measure is envisaged to encourage more taxpayers to voluntarily declare historical tax arrears in order to boost revenue collections by Government. It remains to be seen whether the URA will update the current ledger issues that present incorrect tax positions to enable taxpayers to benefit from this waiver.
One worrying aspect is the fact that debt financing is expected to take up 55% of the budget. With Uganda’s current debt to GDP ratio of 49%, Government continues to face a major financial challenge, with loan interest payments now accounting for such a significant proportion of domestic revenue. According to the Bank of Uganda's December 2023 report, rising debt servicing expenses are putting a burden on tax revenue collection, with debt service accounting for UGX 32 out of every UGX 100 collected.
This accumulation of debt continues to raise sustainability concern due to the increased the debt service burden. It is also worth noting that the projected increase in the use of domestic debt, which is projected to cover 12% of the budget (Ushs. 9 trillion) presents a risk of crowding out the private sector.
To mitigate these concerns, there is a need to urgently facilitate sectors such as manufacturing and agro- industrialisation to widen the tax base and enhance domestic revenue mobilisation. In addition, transparency on Government expenditure and civil society engagement are crucial to encouraging tax compliance as a means of enhancing domestic revenue mobilisation.
By Juliet Najjinda, Senior Manager, Tax Services at PwC Uganda
