IMF’s new report offers practical solutions to the problem faced by the tax administration of countries.
Tax Exemption in Africa represents a major talking point of a new report by the International Monetary Fund (IMF), revealing that tax exemptions in the continent make it hard to administer tax and it only favours the rich rather than the poor and vulnerable.
During her speech at the launch of a report themed: Improving tax expenditures’ reporting in Uganda for improved social economic benefits in Kampala on Tuesday, IMF resident country representative, Ms. Izabela Karpowicz stated that there is no empirical evidence to support the claim that tax incentives have a huge impact on investment in the long term. She maintained that the idea is more regressive than progressive.
She noted that in cases where governments want to offer tax incentives, there should be clear estimates of costs and benefits.
According to the report, which was authored by Seating and supported by USAID, over the last three years, Uganda has forgiven over Shs5 trillion in taxable revenue, which translates into 3.6 percent of gross domestic product, as a result of tax incentives and exemptions granted to both local and mainly foreign investors.
On the other hand, Mr. Moses Kaggwa, the Ministry of Finance director of economic monitoring, said their valuation of the forgiven revenue was much less than what the report had stated, with Dr. Silver Namunane, Ministry of Finance tax policy revenue domestic mobilization specialist, putting it at about Shs2 trillion.
Tax expenditures are special provisions allowed by the tax laws that are beneficial to certain activities or groups of taxpayers. They can be reliefs, exemptions, zero-ratings, credits, or deferrals.
The report further indicates that the country has not stated specific tax expenditure items that should be allowed in a given financial year, and that there is no maximum amount of revenue that should be forgiven or even the maximum number of beneficiaries per sector that should benefit.
During her presentation of the report, one of the lead researchers, Ms. Grace Namugambe, noted that as important as it is to grant incentives, it is vital that the government periodically evaluate and report on the impact of exemptions.
However, in 2020, the Ugandan government published the Domestic Revenue Mobilisation Strategy, which listed as ‘high priority, the need to establish an effective tax expenditure governance framework.
As a result, for the first time, a comprehensive tax expenditure report was gathered for Uganda which provided a basis for the completion of yearly reports in later years.
While discussing the report, a tax expert and a member of the Parliamentary Budget Committee, Mr. Dickson Collins Kateshumbwa, indicated that regardless of the difference in the estimation of revenue forgiven, tax exemptions are sometimes granted absurdly to respond to politics, noting that incentives and exemptions should be institutionalized.
Tax Exemption in Africa: Recommendations of the Report
According to the report’s recommendation, the government should set up a finance committee that will include key stakeholders with knowledge of tax expenditures to give regular updates on tax expenditure repositories as well as arrange the feasibility of proposed tax expenditures and the cost and benefit analyses.
It also recommends constant monitoring and review of tax expenditures, setting up a clear definition of a benchmark tax expenditure to allow for a common understanding as well as ensuring consistency, avoiding misinterpretation, and enabling ease of comparison over years.
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