Low tax to GDP ratio reflects small tax base

Following the recent reading of the FY 2023/24 budget speech, a lot has been said about Uganda’s low tax to GDP ratio which currently stands at 13.9%.  The tax to GDP ratio is a measure of a nation's tax revenue relative to the size of its economy as measured by gross domestic product (GDP). In simple terms, it indicates the extent to which a country’s economic output contributes to its tax revenue.  A low tax to GDP ratio indicates that a significant part of the country’s economic activity is untaxed and that there are fewer actors contributing to the country’s tax revenue.

It is generally agreed that raising tax as a share of GDP is an important part of the development process and a key component of building an effective state. One of the challenges in achieving this is the high level of non-compliance in the tax system.

In 2021, the Uganda Revenue Authority statistics revealed that only one million people in Uganda were paying taxes despite the large population engaged in economic activities. This begs the question as to why few Ugandans pay tax. It is easy to attribute this to factors such as the quality of administration and enforcement but these cannot be the only causes especially as over time, significant improvements have been made to tax administration due to ICT interventions such as the recent introduction of the electronic fiscal invoicing system. Yet, the growth in the tax to GDP ratio has remained marginal.

Therefore, shouldn’t we then consider other highly probable causes such as the general lack of popular support for taxation?  Why is there a lack of support? This may be attributed to a breach of the fiscal social contract between citizens and the state. An important part of every country’s development process is the building of a social contract in which citizens pay tax and, in turn, receive public goods and services. Studies have shown that this is associated with the establishment of a culture of tax payment and a belief that non-payment is wrong.

Therefore, we cannot separate the tax to GDP conversation from the fiscal social contract, central to which is the question of trust. When people pay their taxes, they trust that it is for the common good and the expectation is that the government will apply the resources responsibly, equitably and justifiably and that there is tangible value for taxes paid. 

As taxation is a transfer of wealth from citizens to the government, it is important that it translates into improvements in social services, welfare and governance. Hence, efforts to widen the tax base and expand tax collection must go hand in hand with building trust amongst the citizens through ensuring responsiveness and accountability in the use of tax revenues. While raising additional revenue is important, the bigger conversation must be had on how the additional revenue will be translated into broader public benefits. 

While the tax to GDP ratio, widening the tax base, inclusion of the informal sector, are all useful, if the other end of the fiscal social contract is not fulfilled, the growth in revenue collections will remain marginal. Therefore, as we work towards improving revenue collection, let this be equally matched with real and evident commitments to the other end of the bargain e.g. through fiscal discipline, reduction in wasteful expenditure and improvements in public service delivery.

By Crystal Kabajwara - Business Advisor, PwC Uganda