World Bank Urges Government to Reassess Tax Holidays
World Bank Advises Uganda to Reconsider Tax Exemptions and Holidays
The World Bank has raised concerns about the effectiveness of tax exemptions and holidays in stimulating investment in Uganda. According to recent findings, these incentives have not delivered the expected economic growth or investment boom. Instead, they have led to a significant loss of revenue for the government.
At the 25th Uganda Economic Update in Kampala, Mr. Qimiao Fan, the World Bank’s East Africa regional director, emphasized the need for the Ugandan government to review its tax policies. He highlighted that with over 600,000 new labor market entrants each year before 2030 and at least one million annually by 2040, the country must find ways to mobilize more domestic revenue. This can be achieved by broadening the tax base, closing loopholes, and ensuring that high-net-worth individuals and large firms contribute fairly.
Fan also pointed out that certain tax exemptions are eroding the tax base and shifting the burden to a shrinking pool of compliant taxpayers. He called for a reevaluation of these exemptions to ensure a fairer distribution of the tax load.
Impact of Tax Exemptions on Investment
A World Bank economist, Silver Namunane, provided further insights into the impact of tax exemptions. He noted that while generous tax exemptions and the 10-year tax holiday were designed to stimulate new investments or reinvestments by large firms, this has not been successful. The result is a lack of growth in firms’ fixed assets.
Namunane explained that beneficiaries of these tax exemptions have depreciation allowances that are 2.6 to 3.3 times higher compared to group firms. This suggests that benefiting firms are more likely to replace worn-out assembly lines or add minimal infrastructure rather than significantly expand their assets.
Revenue Loss from Tax Exemptions
According to the 2023/24 Tax Expenditures Report, the total revenue foregone due to tax holidays and exemptions amounts to Shs3.6 trillion. This represents approximately 1.78 percent of gross domestic product (GDP) and 13 percent of total tax revenues of Shs27.3 trillion.
Customs duty accounted for the largest share of Shs1.137 trillion, which is 32 percent of total tax expenditures. Meanwhile, the value added tax (VAT) foregone dropped from Shs1.113 trillion (0.61 percent of GDP) in the 2022/23 financial year to Shs677 billion (0.34 percent) in the 2023/24 financial year.
Over the years, data from the Finance Ministry shows that total tax expenditures increased from Shs2.079 trillion to Shs2.972 trillion between 2018 and 2023. However, as a share of GDP, these expenditures remained broadly flat.
Government Response to World Bank Recommendations
In response to the World Bank\’s proposal, the Ugandan government has expressed willingness to adjust its tax policies but prefers a calibrated approach over abrupt repeal. Acting Ministry of Finance Permanent Secretary and Secretary Treasury Patrick Ocailap emphasized the need to broaden the tax base instead of increasing taxes on the people of Uganda.
Ocailap suggested conducting a cost-benefit analysis of the tax reforms. He proposed that rather than eliminating the 10-year tax holiday, the government should closely monitor the activities of beneficiary firms and implement a sunset clause for each.
Recommendations for Reform
The World Bank recommends that Uganda tighten or scale back exemptions and holidays that cost between 1.6 and 2 percent of GDP annually, while delivering limited investment gains. This would help the government generate more revenue and ensure a fairer tax system.
By addressing these issues, Uganda can create a more sustainable economic environment that supports long-term growth and development.
