Report on the tax policy-making process in Uganda

Uganda’s tax system is broadly conventional from a structural perspective. There are significant taxes on goods sourced through international trade and revenues have shown considerable growth in nominal terms over recent years but it is clear that they remain well below expectations. Uganda is currently a low-income country, faced with the familiar dilemma of needing to raise the level of tax as a share of GDP significantly in order to fund government projects and programmes, while simultaneously wanting to provide an economic environment that encourages both domestic and inward investment. It also faces significant economic and social challenges such as the acute shortage of formal employment opportunities for young people, the need for higher levels of skills in the country’s workforce, and the pressure to modernise and commercialise the agricultural sector. Tax has a bearing on these issues. In this environment, tax policy needs to be creative and interventionist.

Recommendations

The recommendations within this report aim to:

• Improve the quality of tax policy design and related revenue outcomes, which will require more effective collaboration between Ministry of Finance, Planning and Economic Development (MFPED) and the Uganda Revenue Authority (URA), leveraging and upgrading the capabilities of both organisations; and creating a framework to ensure that the agreed DRMS is implemented as intended.
• Draw the understanding and knowledge of Ugandan citizens, businesses and academics more effectively into the tax policy-making process. This will require new policy partnerships and a more structured approach to consultation.
• Empower MFPED to work with other ministries and government agencies to devise tax policy that can spearhead the development of solutions to some of the Government of Uganda (GoU)'s most pressing economic and social policy challenges: promoting sustainable investment, tackling youth unemployment, providing a pathway out of poverty, accelerating agricultural development and upskilling the Ugandan workforce to drive modernisation. This will require a fresh mindset, supported by organisational change.
• Recognise and signal within and outside GoU the importance of well-designed revenue policy to the achievement of its strategic objectives to achieve middle-income status and greater financial independence. This will require organisational and procedural changes supplemented by an effective media strategy.

Expected benefits

The authors believe that there will be significant benefits to GoU, to public finances and to Uganda’s economy and society from implementing the recommendations set out in this report. These will crystallise as higher sustainable revenues, resulting from:

• More effective policy design, better suited to Ugandan society and economy.
• An increased sense of legitimacy and shared ownership of the tax system, strengthening the fiscal–social contract and leading to enhanced voluntary compliance.
• The elimination of many of the causes of disputes.
• Reduced enforcement costs.
• An improved understanding of the tax system among Ugandan citizens.

This work was funded by FCDO (formerly the Department for International Development, at the time the research was undertaken), through the Centre for Tax Analysis in Developing Countries (TaxDev) and the Domestic Revenue Mobilisation Public Investment Management and Transparency Programme (DRUM), and was carried out with the full and wholehearted cooperation of many internal Government of Uganda institutions and several external organisations. It is the first review of its type to be carried out on behalf of a low-income country (LIC). The report includes a review of the relevant literature.