Government tax proposal rejected at birth

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By Christine Kasemiire

By Dorothy Nakaweesi

#Rejecttheunjusttax; a tough label where like-minded Ugandans raised concerns about the tax proposal the government through the finance ministry had crafted, garnered more than 4,000 tweets last week.

There was a plethora of views condemning the government’s proposal on the grounds that the same taxpayers are overexploited.

The views were in response to a government proposal that was revealed by a February 9 letter signed by Mr. Patrick Ocailap, Assistant Secretary of the Treasury at the Ministry of Finance, stressing the government’s intention to introduce a tax on cash withdrawals made through various banking channels such as over the counter, bank branches and automatic teller machines (ATM).

The proposal was based on the need to level the playing field by taxing banks the same way mobile money transactions are taxed.

“Currently, mobile money withdrawals are subject to an excise tax of 0.5%, but over the counter, branch bank withdrawals and ATM withdrawals in commercial banks are not subject to the same tax. “Mr. Ocailap said in the letter.

The government is now proposing a 0.5 percent tax on cash withdrawals in various banking channels.

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The proposal, the government says, will encourage cashless transactions, promote e-commerce and improve tax compliance in addition to generating revenue.

The introduction of a tax on withdrawals means that people will be discouraged from making deposits while those who are paid to the bank could turn to withdrawing all of their money and keeping it with them.

Liquidity pressure

According to the 2021/2022 National Budget Framework Document recently approved by Parliament, Uganda’s budget is projected at Shs 45,650 billion, of which Shs 20,900 billion will go to debt service, against total domestic income. which is expected at only 21.690 billion Shs. .

Essentially, this means that 96.7 percent of Uganda’s total domestic revenue – whose tax revenue is expected to reach Shs 20.13 trillion will be spent on debt service.

Current tax policy

Currently, the 27.7 million mobile money subscribers pay 0.5% excise duty on withdrawal transactions. This is in addition to the 15 percent excise duty paid by customers through mobile money charges. In other neighborhoods, 15 percent of all mobile money charges paid by customers go to the Uganda Revenue Authority (URA) as excise duty.

While banks and their channels also pay 15 percent of their bank fees on URA transactions, they don’t pay the additional 0.5 percent.

Some people in the communications world believe that the tax levied only on mobile money is unfair and should be applied to the entire banking industry as well.

The sentiment of mobile money operators stems from the realization that a part of their customer base is withdrawing from mobile money and turning to banking channels due to falling costs.

“A levy on mobile money contributed to a deficit of Shs 30.4 billion, which can be explained by the fact that high-value customers are withdrawing their funds from branch banking,” said the commissioner. General of the Ugandan Revenue Authority (URA), Ms. Doris Akol, in the statement. the half-year performance of the Authority during the 2019/2020 financial year.

Bankers react

Bankers, through their umbrella organization, the Uganda Bankers Association, said imposing the tax would be counterproductive and make financial and payment services more expensive.

Instead, they came up with new ideas.

“We argue that the 0.5% tax applied to withdrawals made at mobile money points operated by telecom-led mobile money agents is a counterproductive excessive tax burden … and should be removed and replaced by the same excise tax of 15% on fees levied for withdrawals of mobile money or even lowered in all areas, ”reads part of the letter from UBA.

Dr Adam Mugume, Executive Director of Research, Bank of Uganda (BoU), in an emailed response to Daily Monitor, explained that the taxation of cash withdrawals could have a negative impact on bank deposits.

“I think taxing cash withdrawals would be detrimental to the economy as it could impact the growth of deposits in the banking system. In other words, it would encourage individuals to save in pots or under mattresses to avoid tax, ”he said.

Mobile money use rises despite taxes

While mobile money transactions plummeted at the start of the 1% tax levy, which was later revised to 0.5% in 2018, numbers over the years have since rebounded.

Data from the Bank of Uganda shows that the value of mobile money transactions decreased by 8.4% from Shs 73 trillion in 2017 to Shs 66.9 trillion in 2018 when the tax was introduced and rose to Shs 79.7 trillion in 2019.

The story is different when it comes to the number of transactions, which instead jumped from 1.3 billion in 2017 to 2.5 billion in 2018 before peaking at 3.1 billion in 2019.

The value of deposits has increased since 2019, from Shs 1.5 trillion with 32.6 million transactions in January to Shs 2.5 trillion in December 2020 against 59.9 million transactions.

Withdrawal transactions increased from 21.9 million worth Shs 1.4 trillion in January 2019 to 36.1 million worth Shs 2.5 trillion in December.

The number of subscribers increased from 23.5 million in 2019 to 30.5 million in 2020.

This indicates that even though the tax has made the costs higher for the public, they have no other easier option as the world is currently addicted to the convenience that the government capitalizes on.

The search for income

This might just be the start of what lies ahead as the country is in dire need of income.

The harsh reality that Uganda, especially with the emergence of Covid-19, needs more than ever to have increased and consistent revenues collected cannot be ignored. Due to global lockdowns and slowing economic activity, international taxes that were already plummeting as the country enters into common market protocols have fallen further.

The wait for donations from donors has also proved unbearable.

During the first quarter of fiscal year 2020/21 (July to September), URA raised Shs 4 trillion against a target of Shs 2,900 billion, resulting in a large surplus of around Shs 1 trillion. Shs.

While one of the reasons for the positive performance of the tax body was the reduction of the target from Shs 21.8 trillion to Shs 19.6 trillion, the URA also attributed the surplus to the increase in internal taxes with import substitution.

The drop in international taxes also led to a revised program by the tax administration to look inward and collect more taxes locally through the domestic revenue mobilization strategy.

As a result of this change, the Administration is looking for new ways to generate national revenue.

However, due to the pocket tax base of 1.6 million taxpayers that keeps the country afloat in domestic revenue, the familiar old story of over-taxation runs deep in the hearts of Ugandans.

However, tax policies are expected to have a regressive impact on financial inclusion by discouraging unbanked people from joining the formal financial sector.

The proposal to tax the already heavily taxed was rejected by the public citing double taxation and over-exploitation.

In addition, poor service delivery, corruption, and growing indebtedness further discourage compliance among taxpayers.

Reactions to the proposed tax

Dr Fred Muhumuza, economist and lecturer at Makerere University, notes that an error should not be used as a standard to define future practices.

“It was a mistake to tax mobile money withdrawals and we cannot use it as a reason to tax bank withdrawals. What exactly do we tax? The bank that offers this service receives taxable income. The recipient of the service should not be taxed, ”he says.

Robert Lule, a private digital consultant, says: “It catalyzes the use of digital technologies, but we need to push for an enabling environment without disruption of government and security. The other aspect is to strengthen confidentiality and data protection. Security should immediately stop eavesdropping on phones and confiscating people’s electronic gadgets. This compromises the trust dynamics of digital systems. Digital identity mechanisms should be pursued, especially when it comes to harmonizing personal files across all identity registries. Electronic payment platforms and laws should be streamlined. What’s the update on interoperability? Transfer margins and prices should be affordable. In Nigeria, electronic interbank transactions attract 50 Naira or 500 Shs and for some banks there is no charge. How can this be implemented in Uganda? The pricing issues are going to be very big if we are to generate cashless trading at the merchant level.

Ms. Jane Nalunga, National Director of Seatini Uganda, said: “Let the government tax the digital economy”.

Hard times ahead

Government under pressure to identify new sources of revenue

This might just be the start of what lies ahead as the country is in dire need of income.

The harsh reality that Uganda, especially with the emergence of Covid-19, needs more than ever to have increased and consistent revenues collected cannot be ignored. Due to global lockdowns and slowing economic activity, international taxes that were already plummeting as the country enters into common market protocols have fallen further.

The wait for donations from donors has also proved unbearable.


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