Double taxation is taking its toll on small businesses, the report said

The Equal Opportunities Commission wants tax policy to be revised to protect citizens against unfair and high taxes.

Uganda lacks a clear and comprehensive tax policy, which has resulted in an unfair tax burden on certain segments of the population, according to a new report by the Equal Opportunity Commission (EOC).

The ‘State of Equal Opportunities in Uganda FY 2023/2024’ report, published on Wednesday, shows that a tax system can either be progressive – taxing high-income earners more heavily than low-income earners – or repressive – where high incomes and people with low incomes pay the same tax, which is heavy for people with low incomes.

The EOC points out that taxpayers in Uganda often face multiple taxes, with different authorities imposing taxes or legal fees on the same income. For example, a company may be required to pay corporate tax to the central government, while also having to pay municipal tax on the same income. In addition, there is a widespread lack of awareness about taxes, with many citizens unaware of the taxes they have to pay or how the tax system works.

The report highlights that while taxation can be a tool to increase government revenues, control prices and redistribute wealth, it can worsen inequality if not managed properly.

The EOC also emphasizes that bureaucratic inefficiency and corruption often hinder access to reliable tax information, leading some taxpayers to resort to informal channels or even bribes, undermining the integrity of the system.

Public perception of high and unfair taxes further fuels resistance to compliance, making confidence in the effective use of tax revenues essential for improving tax compliance.

President Museveni has repeatedly criticized the Uganda Revenue Authority (URA) for not collecting enough taxes, pointing in particular to the large part of economic activity in Uganda that remains informal and untaxed.

In a statement on October 31, he compared Uganda’s tax-to-GDP ratio, which currently stands at 11 percent, with European countries, where countries such as Denmark (46.3 percent), France (45.4 percent) and Sweden (42.9 percent) manage collect higher revenues. part of their GDP in taxes. He called on the URA to improve its efforts to increase Uganda’s tax revenues.

EOC chairman Safia Nalule Juuko has called on agencies like URA to conduct massive sensitization campaigns and consolidate the tax system to ensure that no group is unfairly taxed.

“The government is losing significant revenue due to the lack of a proper tax system, and many Ugandans are defaulters because they simply do not know what to pay,” she said.

The EOC report also indicates that very few household heads pay income tax, with only 1.4 percent of respondents in the Uganda National Household Survey (UNHS) dataset reporting income tax payments.

A separate survey of small businesses found that they are more heavily burdened by local government fees than by taxes collected by URA.

Overall, income taxes were found to have minimal impact on poverty and inequality. On the other hand, Value Added Tax (VAT) affects everyone from the poorest to the richest.

For the poorest households, monthly consumption falls by 11 percent after VAT deduction, while the richest see a decline of 12 percent.

The EOC also revealed that abolishing VAT could lead to a reduction in poverty by around two percentage points; However, completely abolishing VAT is impractical due to the government’s revenue needs.

For example, exempting essentials such as salt, firewood, matchboxes, household candles, bath soap and water could result in a 0.17 percent reduction in poverty, but the overall effect of VAT on inequality is minimal.

According to the report, the impact of excise duties on consumption, poverty and inequality is less significant than that of VAT. The impact of excise taxes on poverty and inequality is relatively low. When it comes to small and micro businesses, local government reimbursements pose a bigger challenge than income taxes.

The Commission recommends revising licensing and fee rates to reflect the size of the business, and ensuring that larger companies pay higher trading license fees than micro and small enterprises.

“Currently, trade license fees are determined by location, which results in micro and large businesses in the same area paying the same amount, which is an unfair tax practice,” part of the reports said.

The EOC has proposed a review of Ugandan tax policy and developed initiatives that will promote compliance and prevent businesses from being overwhelmed by informal fees.

The Equal Opportunities Commission report for the 2023/2024 financial year urges the government to exempt basic items such as salt, candles and kerosene from value added tax (VAT). For example, salt was exempt from VAT between 2008 and 2014, but this exemption was lifted in 2014, resulting in an immediate increase in salt prices.

The EOC has also urged the government to identify taxpayers to build rapport and support those who are abiding by the rules but struggling to generate revenue. Rather than relying solely on heavy taxes, the EOC wants tax authorities to explore ways to enable these individuals and companies to start paying taxes.