A Case for Increasing Individual Income Tax Relief

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Uganda has had the same individual income tax thresholds for the past twenty (20) years. That has left us (current individual tax payers) suffering with a debt burden amounting to now 16% of the Government Tax Revenue collections. The group of persons contributing this amount of tax only amounts to just over 4% of the population (about 1.4million people).

This group of the population is the one which is formally employed in companies and businesses that are well incorporated and thus can be easily followed upon by URA. The URA has not bothered to generate methods in which it can increase its revenue collections from the informal sector.

Most individuals in the informal sector assume that the payment of KCC license fees equates to payment of taxes. URA has to play the role of tax education.

The 1.4million PAYE taxpayers have been made to cater for the collection incompetence of the URA. As such as the inflation of the country has been growing by year, living standards going up, the tax rates have remained stagnant and thus made the country’s formal workers poorer as they have not been able to match their consumption and savings to inflation.

When we have an annual inflation of 10% for 20 years, this has made most goods to become at least more than 8 times the cost in 1990. However, in 2010 we still had the same tax relief (tax threshold) of maximum 410,000shs which in today’s economy cannot help much.

In 2010, 410,000shs cannot enable one buy food, pay for transport costs, pay for utilities like water, electricity, and also enable one to save like buy 1,000 shares in the cheapest priced USE stock of Uganda Clays Limited at 60shs a share. This amount of money is not enough to enable the worker pay for medical bills, buy some decent clothes, have a vacation. The Employment Act entitles a Ugandan worker to a vacation and this is usually 21 working days. This is most times wasted as the worker has no savings to take a rest. Most times he would prefer to stay at work and be paid for that month.

In Kenya as in Tanzania, the highest tax relief amount is KShs 38,892 and TShs 720,000. These translate at today’s rates to 972,300Ushs for Kenya and 1,080,000Ushs for Tanzania. This shows that Ugandans are paying twice as much tax as our neighbours and thus have less money left in our wallets to spend in the greater economy than our neighbours. It is no wonder then that even with over 20 commercial banks, the population utilising their services is under 2%.

The reduced income after taxes has led the country’s populace have a poor savings culture. The deposit making population is far fewer than the loan seeking one thus one of the reasons for high loan interest rates. Since fewer people are saving, there exists less money to be reploughed into the economy and thus the greater Ugandan economy is suffering. The high loan interest rates also discourage entrepreneurship and the brave persons that get the loans are stressed out from the high interest payments required which are far higher (about thrice) than the GDP growth rate.

As such, in the campaign for an increase in tax relief to individual tax payers we foresee the resumption of our economy. This we believe to happen in two significant ways.

Growth of Local Businesses
This is bound to happen from an increase in effective demand from individuals. With more money from tax relief, individuals will be able to demand consumer goods like clothes, imported accessories, vehicles as well as increase in local tourism. One thing noted is that the Kenyans and Tanzanians are a leading source of tourist revenue in their own countries and this would be most welcome to Uganda which is now dogged with security PR issues because of Somalia that is shutting out foreigners.

The increase in wallet sizes will increase by as much as 500,000Ushs if we are to say get thresholds such as those in Kenya or Tanzania. This will enable the individuals purchase goods most of which are VAT charged. Thus the amount can be estimated to be taxed by at least 18% in the first month. Then because the money is in the economy, the remaining 82% of the tax relief will remain in circulation leading to purchases and savings which will also fetch taxes in either VAT, interest payments, WHT or whatsoever other mode till altogether the government gains it all. But before it goes to the government, the economy would have made use of it in so many various ways that will also create lots of profits for other corporations leading up to 30% tax on these profits.

Growth in Savings
The savings of individuals is bound to increase after an increase in thresholds. This will not only help boost our capital markets and commercial banking sectors but it shall also enable the enterprising Ugandans (who are many per the numerous surveys) have access to cheap loan capital.

The biggest gainer is bound to be the capital markets. There are many other products in the capital markets which have not been utilised by Ugandans and among them includes Unit Trusts which entail savings. The increase in savings will boost these saving schemes and since they also ultimately invest in both the money and other capital markets such as stocks we are bound to have growth in our economy.

The campaign to increase the tax relief or tax thresholds is bound to not only help individual Ugandans but other Ugandans from the money that is retained in the economy. The country should look at the increase in tax thresholds as retention of profits in a business with greater growth potential versus the payment of dividends. The payment of dividends will help the shareholder (Government) in the very short term but retained profits (increased tax relief) will enable more profits (bigger growth of economy) and thus the shareholder will reap more in future

By Kayigwa Rafayili <> the writer can be reached at krafayili@theworkzine.com

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