Uganda’s $12b budget offers tax waivers, credit access to SMEs

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A production line at Roofings Ltd Namanve factory. Many firms have shut down or are operating at half capacity. PHOTO | COURTESY

In a bid to get the Ugandan economy moving again after nearly three months of lockdown to curb the spread of coronavirus, the government on June 11 presented a budget offering a host of tax waivers and funding for the business community.

The plan to boost economic recovery seeks to support the agriculture sector for food security and export, make credit accessible to small businesses, give tax holidays to firms and put money directly into people’s pockets.

According to Finance Minister Matia Kasaija, the county’s Ush45 trillion ($12 billion) budget for the 2020/2021 financial year is aimed at “stimulating the economy to safeguard livelihoods, jobs, businesses and industrial recovery in the wake of the effects of the coronavirus pandemic.”

Minister Kasaija, who presented the budget amid a heavy thunderstorm on Thursday said that despite the negative effects brought on by the pandemic, the country’s GDP by the end of the current financial year is estimated to be Ush138 trillion ($36.8 billion) with the economy growing at 3.1 per cent by the end of June. This is much slower than the average growth rate of 5.4 per cent in the previous four years.

“These objectives address the three most critical aspects of Ugandan society namely: The peoples’ welfare, the viability of farms and businesses, and the social eco-system in which they exist,” Mr Kasaija said. This, he said, will also restore household incomes and safeguard jobs by reigniting business activity, providing tax relief to businesses, enhancing economic infrastructure, improving governance and maintain security law and order.

According to Mr Kasaija, the government will roll out interventions to increase agricultural production to ensure food security and expand regional food exports, a move it hopes will restore demand for agricultural produce which will in turn restore jobs and other non-farm incomes.

Uganda’s economy, which is 80 per cent agriculture-based, has suffered a significant drop during the lockdown that coincided with harvest season of cash crops vanilla, coffee and tea. To boost the sector, Ush300 billion ($80 million) has been set aside to cater for improved agricultural inputs and up-scaling extension services to boost production.

The government also plans to undertake intensive public works in urban and peri-urban areas to create jobs for the “vulnerable but able bodied” people affected by Covid-19 and put money in their pockets through allocation of Ush130 billion ($34.7 million). Organised special interest groups like the youth and women will be allocated Ush256 billion ($68 million) the minister said.

BUSINESS ACTIVITY

According to a recent report by Makerere University-based Economic Policy Research Centre (EPRC), the lockdown affected mostly the micro-, small- and medium-sized enterprises, a number of which have either ground to a halt or are operating at below 50 per cent capacity. To improve credit and cash flows of these businesses, Mr Kasaija proposed Ush94 billion ($25 million) to be provided through Saccos and micro finance institutions.

These are the backbone of Uganda’s economy and employment, representing an estimated 85 per cent of private sector companies. Mr Kasaija said that restoring economic activities of such businesses will enhance household incomes especially in urban areas.

Manufacturing, agribusiness and other private sector firms will see an increase in access to credit at the Uganda Development Bank, which will be recapitalised with Ush1 trillion ($267 million) over the medium term.

“We shall increase funding to Uganda Development Corporation for public-private partnership investments to facilitate our import substitution and export promotion strategy, starting with Ush138 billion ($36.8m),” Mr Kasaija said.

The government will also push for banks to restructure loans to their borrowers who are facing liquidity constraints and reduce charges on mobile banking and mobile money transactions, “to improve efficiency, reduce person-to person contact to prevent the spread of coronavirus.”

A total of Ush673 billion ($180 million) has also been earmarked as payment of arrears by government to private sector firms starting next month to address liquidity constraints faced by government suppliers.

TAX RELIEF

To further address the short-term liquidity requirements of businesses in the tourism, manufacturing, horticulture and floriculture sectors, the government will defer payment of Corporate Income Tax or presumptive tax for tax compliant corporations and SMEs with a turnover of less than Ush500 million ($133 million) per annum with no accumulation of interests and penalties.

The Pay as You Earn (PAYE) tax will also be deferred until September while interests and penalties on tax arrears accumulated before July 1, will be waived to reduce the tax liability of businesses.

The minister also said that about Ush120 billion ($32 million) will be refunded as outstanding VAT refunds by the Uganda Revenue Authority. However, controversial taxes like the Over the Top tax levied on social media and the mobile money tax have remained.

The government is on the other hand encouraging the reduction of mobile money and other digital transactions fees that are charged by mobile network operators and commercial banks in order to limit the use of cash and customer visits to banks.

BUDGET FINANCING

With the scrapping of several taxes coupled with looming low revenue collection this financial year, the government will raise funds by tightening loopholes in its taxation system and borrowing both domestically and externally.

The country’s revenue target for the next financial year is Ush21.8 trillion ($5.6 billion) comprising of tax revenue of Ush20 trillion ($5.3 billion) and non-tax revenue of Ush1 trillion ($26.7 million) representing 14.3 per cent of GDP. The balance is to be covered by international borrowing and development assistance.

To achieve this target, the country will roll out use of digital tax stamps and expand the range of products covered in order to deter under-declaration of production and importation, widen the scope of income tax withholding agents across all sectors and enhance rental income tax collection and compliance.