Tax Exemptions and Developing Economies

The issue of tax exemptions in Uganda is one that has resounded a lot in the media. From the suspension of some tax exemptions in the 2014-2015 budget to the current Tax Appeals Tribunal ruling on whether the Minster of Energy had the power to issue tax exemption to Tullow Oil Uganda and Tullow oil Operations Pty. These events have made me ponder anew about tax exemptions, what are they and their effect on our economy.


It should be noted that our economy is known to have one of the most tax exemptions. The recent case of Tullow Oil and Uganda Revenue Authority perhaps shows how much Uganda government would have lost had a capital gains tax exemption been upheld by the Tax Appeals tribunal or what it stands to lose if the decision is overturned. 
Bilateral donors including the World Bank have over the years been calling on government to remove and/or reduce tax incentives, saying they had outlived their usefulness and more so at a time when there was need to widen the tax base and raise abundant revenue to finance a larger part of the budget.


It is little wonder that while presenting the budget on June 12, Finance Minister announced the scrapping of several tax exemptions, which she expects Parliament to pass so as to raise the revenue to fund the budget. 
What then is the essence of tax exemptions are what is the impact of these exemptions on an economy. To be exempt from tax is to remove the burden of paying a particular tax to the government. Many times these tax breaks or holidays and exemptions are used to attract investors and encourage a certain investment in a particular sector. The million dollar question therefore is? Is investment directly proportional to tax exemptions? Various surveys have shown that what investors need more than incentives are a better environment for doing business such as better infrastructure, political stability and utilities such as cheap energy, and piped water, which bring in better returns on investment than the tax incentives. Exemptions may not necessarily attract investors as the other factors do.


The effect of tax exemptions is wide and not only touches the economy at large but also the ordinary man. In order to determine the costs of tax incentives and exemptions, it would be prudent to have the computation to include not only the revenue foregone, but also associated benefits such as raising income, job creation and technology transfer. 
In its 2010 report, the African Development Bank estimated that Uganda loses at least 2% of its GDP from tax incentives, thus the Country is being deprived of badly needed resources to reduce poverty and improve the general welfare of the population.


The URA, however, needs to recoup this tax that has been exempt. Take a look at the USD 400m that would have been exempt. Where would it come from? The answer lies in you as the tax payer. This burden then shifts to the tax payer to cover up this loss. With every exemption for a big investor, comes a higher tax burden to the populace.
Whether exemptions increase development or simply enhance tax burden on the already poor populace is a question whose answer is nether yes or no.


In my opinion, Tax exemptions and incentives must be given in a properly structured environment if the Country is to realize the intended policy objective for which they are given without necessarily increasing the tax burden on the common man.


Whilst granting these exemptions, it must also be observed that incentives per se do not attract Foreign Direct Investment (FDI). Other factors such as the efficiency of political institutions, market size, or the education and productivity of the local labor force and other factors of production should be put in place to create a conducive environment for productivity, creativity and investment.