Thursday, July 8, 2010


A paper for the attention of the Honourable Minister of Finance.
Planning and Economic Development

 Introduction
 The focal points of poverty eradication action plan (PEAP)
 The Effect of Taxes on Industries
 The way forward
 Conclusion
By Willy, Kituuka
P.O.Box 2678,
Email: wkituuka

A1 Poverty has various dimensions. At the personal level people may be deprived of adequate nutrition, good health or education. Economic factors, such as low income, few assets or little access to markets or public services can force people into poverty.
A2. The day today live hood of an individual is financed by his disposable income. As the Uganda Government gets to fight poverty through implementing the Poverty Eradication Action Plan (PEAP), it is absolutely important to have a study undertaken into all those aspects that eat into individual’s incomes more so the disposable income and hence assess the impact.
A3. It is true that government policies in Uganda to some extent abet poverty. This can be expounded on as follows.
A3.1 The impact of taxes across the board is such that many a businessman has had to evade taxes. Much as taxes are undesirable on the part of most tax payers and would be tax payers, it also true that those who evade taxes on a number of times first find the tax rates on the high, a position which has made a number of would be participants in the Uganda market to take their business ventures elsewhere outside the country. (In Vision 2025 A Strategic Framework for National Development. Volume Two – (Background papers) December 1998) under - Sectoral performance: Manufacturing: -
It is said “Lack of competiveness is still a major problem in the manufacturing sector. Several studies conducted by Uganda Manufactures Association (UMA) indicate many difficulties that are constantly experienced by manufactures in entering regional and International markets. Surveys indicate that the main sectoral problem is lack of competiveness due to high factor costs arising out of low productivity of the labour force, unreliable high costs of utilities and transportation.
A3.2 It is also true that some businesses have been given a leeway to evade taxes
by the tax administrators. Such business have been able to offer goods and services at a cheaper cost compared to their counter parts a situation which has led some businesses to lose out and others to leave the Uganda market.
A3.3 It has specifically been put to government to reduce the taxation on petroleum products as those taxes affect the cost of production across the board. It is not clear why Government has kept to the policy which does not help the economy keeping tax rates high which situation not only encourages the smuggling in of fuel, but also generally keeps tax revenues from petroleum products lower as compared to a situation of lower tax per litre of fuel. (This can be proved practically).
A3.4 A number of commission agents have come into play. Many of these are free to come up with charges to the users of the services they provide. These among others include (I) UTODA (2) Market tenderers to mention a few. It is true that UTODA realizes a lot of money from the transport operaters, one reason which contributes to the high transport fares for taxis. Owners of taxis are out to make money for UTODA and no body seems to come out to object.
A3.5 The failure of Government to have a good portion of the resources realized in taxes used in productive investments is a sad affair. This is greatly attributed to the high corruption rate which leads to the siphoning of substantial sums of money that end up as individual consumption instead of public consumption.
It wouldn’t be hard after taxing so much an individual income if he would be sure of near to free services at the government health establishments. It is true one has to pay for treatment in most of these hospitals! The diagnosis in same cases may be free but drugs have to be bought.
A.3.6 Ugandan exports are not competitive enough. The cost of production is higher in Uganda than in some neighbouring countries such as Kenya. Transport adds an extra cost to raw materials, wage rates are low but productivity of labour is even lower. Telecommunication and electricity companies charge high prices (Export Policy Analysis Unit) Ministry of Finance and Economic Planning EPAU Research Study N0. 1 Impact of Government Investment and Export Promotion Policy-June 1994.
A.3.7 High production costs- maintaining competitive primary inputs is one of the elements influencing production costs. Exporters complain that the price at which they had to buy locally produced inputs was an obstacle to their international competitiveness. Sometimes, primary inputs sold in the local market exceed the world market price!

The Poverty Eradication Action Plan (PEAP) as briefly outlined below for the purpose of this paper falls short of realizing poverty as induced by Government polices
PEAP briefly.
B1. The summary version of the Poverty Eradication Action Plan (PEAP) 2002 by the Ministry of Finance, Planning and Economic Development – May 2002, “Fighting poverty calls for pro-poor growth and pro-poor growth calls for sound economic policies to stimulate investment and jobs for the poor. It calls for a good institutional frame work for delivering public goods and services not only efficiently but also fairly”. The PEAP set out the framework within which both the public and the private sector can tackle the complex causes and dimensions of poverty. More importantly it focuses on the need for progress on four fronts namely:
i) Increasing investments and the competiveness of the economy (economic growth & structural transformation)
ii) Improving the ways of exercising political, administrative and managerial authority and protection of basic rights and poverty (enhancing good governance & security).
iii) Increasing poor people assets and production hence their ability to earn higher incomes; and
iv) Investing in the quality of life of the people through better education, health services and provision of safe water.
B2. The successful implementation of the PEAP is expected to reduce absolute poverty to less than 10% of the population by the year 2017 and to increase the well being for all Ugandans.
B3 Since the causes of poverty within a household and in society are interrelated, the PEAP has four complimentary main goals or “Pillars” which are interlinked and seek to address all the dimensions of poverty.
They are:
1) Rapid and sustainable economic growth and structural transformation
2) Good governance and security
3) Increased ability of the poor to raise their incomes
4) Enhanced quality of life of the poor.
B4 According to PEAP, projections of the performance of the economy over the next 15 years (from 2002) indicate that growth will enable the poverty reduction targets to be met. Income will grow provided private companies invest, quality and access in education continues to improve, infrastructure and utilities are reliable and structural change takes place in the agricultural sector.
B5. PEAP also assumes that continued economic growth and fall in poverty will depend on decisions taken within government and the private sector by firms, households and individuals. Growth will only be sustained if:
1) It is accompanied by structural change. This means more activity in the higher earning sectors of the economy such as manufacturing and services. Within agriculture, it means more cash crops and more processing and marketing of food crops.
2) Exports are diversified, so that the economy can cope with the uncertainties of international trade and competition.
3) Borrowing is kept to reasonable levels and inflation remains within the government target of 5% or less
4) The nation uses its natural resources wisely.
B6 More efficient and equitable taxation.
Government is to continue to consider how to widen the tax base. At the same time it is reviewing taxes which may be restricting economic growth or impacting unfairly on the poor.
Effects of the 1993/94 Budget on local/Industries as produced by Uganda manufacturers Association (UMA) (August 1993 Report).
C1 The tax policy was being high lightened and it’s impact on Uganda’s industries. The very high tax rates have profound negatives impact on the ability of several key industries. And, it is true from past experience that the higher rates of tax well not generate the expected government revenue in the long run. Capacity utilization has fallen dramatically hence putting added financial pressure on Ugandan manufacturers and increasing their unit costs. The eventual outcome of these policies is to lose manufacturing capacity, employees losing jobs, government foregoing desperately needed revenue, and Uganda’s image as a place to invest being badly damaged.
C2 There is a feeling among the local private sector that the current tax strategies do not bode well for existing and would be investors.
 It is essential to develop and design a long-term strategy on tax policy and tax administration, which will ensure growth of the manufacturing sector, and of the private sector generally as the engine of Uganda’s economic development.
C3 The cost of utilities mostly electricity. The high bills are partly due to the Company failing to collect bills from all the consumers, hence those who pay actually subsidies those who don’t hence the hiked prices for power.
C4 UMA shares the government view that taxation is necessary if government is to function. The issue is to determine the appropriate rates of tax to balance the needs of the government and the taxpayer, and not to focus exclusively on attempting to maximize tax revenue in the short run.
C5 It is important to have fairness and equity in the tax structure of Uganda, while at the same time, meeting the expectations of both Government and the tax payer. A good tax system combines fairness, simplicity and efficiency. It ensures that the tax structure and tax collection are transparent and that every taxpayer knows his obligations in advance. An efficient tax system does not distort other aspects of the economy say, taxes should not dater investment and increased production.
C6 A good system of taxation promotes compliance through generally low rates and does not rely on heavy taxation of a few easily-identifiable tax payers to make up revenue lost through inefficient tax collection. In particular, it doesnot provide incentives for people to engage in smuggling at the expense of both government and local manufacturers.

C7 Available data indicates that the tax burden in Uganda falls disproportionately on local industries (producers) while many importers escape taxation through smuggling from neighbouring countries.
It is absolutely important for government to commission studies as soon as possible on the role of taxes and the various charges put to the general public in the promotion of poverty. It is clear that in whatever the people buy is a big margin in form of taxes. The services like those of UTODA much as they are necessary, there is need for a regulatory arm to ensure that the public are not over burdened by these charges. When the study outlined above is completed government and mostly so the Ministry of finance planning and economic development will be able to make appropriate deduction in the tax rates.
These rates when reduced across the board will boost increased consumption of goods and services, people’s welfare will be boosted and many of the tax payers will find the rates affordable and hence will pay and remain in business. And those businesses that have migrated because of the unproductive business climate may be able to relocate to Uganda.
Finally, it is absolutely important this time that the Ministry of finance fixes most so that thy are varied for a period of about 5 years. This innovation is necessary for investors to project with certainity the productuctivity of their undertakings.
D1 The assumption by PEAP that incomes will grow provided private companies invest, quality and access in education continues to improve, infrastructure and utilities are reliable and structural change takes place in the agricultural sector may all be taken as necessary factors but are not an end in themselves if government policies mostly on taxation and utility as well as user charges are not checked.
D2 Government’s concern about more efficient and equitable taxation as stated in the PEAP document can only be realized or be made meaningful if serious studies are undertaken to come up with the actual quantifiable impact of the taxes on the economic activity, and households generally, more so how they impact unfairly on the poor.
If poverty induced by government policies is reduced to the minimal, it is likely that the need to have many children study for free for example will not be necessary for the income many of the parents earn can go along way in meeting the school needs but when they are over taxed the burden is shifted to government.

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