Uganda's tax regime is still the highest in EAC

The Ministers of Finance in Burundi, Kenya, Rwanda, Tanzania and Uganda read their respective budgets for financial year 2023/ 2024 on 14 June 2023.  The Democratic Republic of Congo and South Sudan Ministers of Finance are yet to read their budgets.  The good news is that generally Gross Domestic Product (“GDP”) for financial year 2022/ 2023 (“FY 2022/2023”) in Kenya, Rwanda, Tanzania and Uganda has been projected to grow with Rwanda leading the pack at 6.2%.  Apart from Tanzania that managed to keep its inflation rate at an average of 4% as of May 2023, Burundi, Kenya, Rwanda and Uganda have seen spikes in their inflation rates.

The Uganda Shilling remained resilient against the USD despite the elevated inflation and increase in interest rates by the United States Federal Reserve.  However, the Tanzania Shilling registered the best performance in the region as of March 2023 having depreciated the least against the USD. As the East African states continue to manage their foreign exchange and Kenya seemingly most affected by availability of foreign exchange, the bigger question for most of the East African states is the debt sustainability and how the debt commitments will be funded in FY 2023/2024.

To fund the debt payments, several tax measures were suggested across the East African states.  We have seen Kenya, Tanzania and Rwanda suggest tax changes and some of them are anchored in increasing the applicable tax rates.  On the other hand, the proposed Uganda tax changes do not necessarily increase tax rates but rather are targeted at an efficient tax administration system and reducing revenue leakage.  Could this be a case of Uganda going against the grain and seeking not to over-tax its citizens while its neighbours are seeking to increase tax rates to collect tax? A glimpse of the recent proposed tax changes (both direct and indirect) across some of the East African countries could attempt answer this question as well as show if there is any room left for increasing tax rates in Uganda.

Direct tax changes

Individual income tax rates

Kenya introduced two additional tax bands for their Pay As You Earn (“PAYE”) i.e 32.5% and 35% being the highest marginal tax rate.  The argument that was advanced by the Kenyan National Treasury was that the proposal would make the PAYE bands more progressive.  This means those who earn more should be able to pay more tax, which is a fair argument if you ask me.  In Uganda’s case, our lawmakers already increased our marginal PAYE rate to 40% effective 1 July 2012.  Considering Uganda’s PAYE rates are the highest across East Africa, there is limited room to increase this rate.  However, for the case of Kenya, in addition to the new tax bands, government has also suggested that employees will be paying a National Health Insurance Fund levy of 2.7% and 1.5% of their gross salary to support the country’s affordable housing program.  Uganda does not have any similar levies proposed this year but considering the current discussions on the National Health Insurance Scheme, it may be a matter of time. Such a proposal would require a review of the current PAYE rates considering they are already high.

Taxation of branches

Kenya proposed a tax rate of 15% on repatriated branch profits which seemingly means that a Kenyan branch will pay tax at an effective tax rate of 40.5% (30% corporation tax plus 10.5% (100-30)*15%)). Currently a branch in Kenya is taxed at a rate of 37.5%.  The effective tax rate of a Ugandan branch is already 40.5% and this has probably been the case since the Income Tax Act came into force in 1997.

Indirect tax changes

Local excise duties

Tanzania has broadened its excise duty regime to now include cement and the  rate applicable  is TZS 20 per kilogram.  The government argues that this change is meant to increase revenue and reduce the effect of greenhouse gas emissions in the country.  For over five years, Uganda has been imposing excise duty on cement and currently the rate of excise duty on cement is UGX 500 per 50kgs which is UGX 10 per kilogram.  Considering the 1TZS to UGX is about 1.5, the proposed excise duty rate in Tanzania is higher than Uganda but needs to be looked at in the context of the varying economic environments.

Regarding cigarettes, Uganda currently charges excise duty of 200% on Cigars, cheroots and cigarillos containing tobacco and other tobacco substitutes whereas Tanzania is only proposing to introduce a 30% excise duty on the same for FY 2023/2024.

Accordingly, you may note that whereas we see some increases in tax rates in Kenya and Tanzania, Uganda is already charging tax on the same items and probably has limited room to increase these tax rates.  However, even where we have seen neighbouring countries reduce tax rates in some respects to make their tax regime more competitive and allow business to further thrive, the comparable Ugandan tax rates remain high.

For example, Tanzania is proposing to remove the mobile money transaction levy on sending and receiving monies electronically but increase of the levy on withdrawals by 50% of the current rates.  Likewise, Kenya is proposing to reduce the excise duty rate on money transfer services from 12% to 10% to encourage financial inclusivity and promote economic activity for Micro, Small and Medium Enterprises.  On the other hand, Uganda has maintained the same excise duty rates at 15% of fees charged which seemingly contravenes the National Development Plan III 2020/ 2021 – 2024/2025 ICT focus area on digital inclusion.

Comparatively across the East African region, the Uganda tax regime appears high. Therefore, government’s decision to expand the tax base using other means other than increased tax rates seems to be a step in the right direction especially when there’s only so much left to tax and the citizenry already feel like they have been taxed to the hilt.

By Trevor Lukanga - Senior Manager, Tax, PwC Uganda