Tax incentive is an exemption from a tax liability, offered as an enticement to engage in a specified activity such as an investment for a certain period, reports New Vision.
Governments argue that tax incentives stimulate employment and development by making the country competitive as a destination for foreign investment. However, tax incentives have doubled-edged impacts on the economy.
The measures may not only promote trade or particular sectors in the economy but will also result into revenue loss. Research suggests that developing countries do not need to grant tax incentives and exemptions to attract Foreign Direct Investment (FDI). Because the decision to invest is largely based on the country’s overall investment climate.
This view is emphasised in a 2012 study conducted by SEATINI-Uganda which established that tax incentives appear to have a contradictory impact on the economy. For example, in the year 2009/10, tax exemptions resulted into a direct loss of 3.99% tax to GDP ratio. Without the exemptions, the tax to GDP ratio would have reached a level of 16.15%, according to the Ministry of Finance, Planning and Economic Development report of 2011.
The International Monetary Fund (IMF) has discovered that some of the tax incentives and exemptions that Government is granting are unhealthy for the economy, and has continuously encouraged government to reduce tax incentives. At the start of 2017, the media has been awash with reports of the amount of tax that government has paid in respect to the tax exemptions.
This year the Government will spend sh77b to pay taxes for Bidco Oil Refineries Ltd, Aya Investments Ltd, Steel and Tube, Cipla Quality Chemicals, Uganda Electricity Generation Company Ltd and Uganda Electricity Transmission Company Ltd.
This is as a result of tax exemptions/incentives given to these companies. The amount of money being paid in taxes for these companies could do boost sectors like trade that have been allocated a dismal sh94.39b which amounts to 0.4% of the sh28,252.5 trillion National Budget FY2017/18.
Tax incentives and exemptions equals to tax foregone and ultimately has to be paid by someone else. Parliament needs to review Article Section 77(1)-(2), of the Public Finance Management Act (PFMA), 2015, which allows the responsible minister to award tax exemptions and there after report and justify the award to Parliament. This limits parliament oversight role before exemptions and incentives are awarded.
Therefore, there needs to be a more transparent approach of giving incentives and exemptions which would provide for more scrutiny and debate by decision makers and all stakeholders. Government and civil society need to conduct a comparative cost benefit analysis of all tax exemptions/incentives that have been given thus far to ascertain whether they have benefitted the country. Most importantly is, the Government of Uganda should withdraw all tax incentives it has given and have not served their intended purpose.
Article compliments IFC Review.