Tax Evasion in Uganda

11th September 2007 (The Monitor)
ONE the biggest problem URA faces in enforcing tax administration in Uganda is tax evasion. Tax evasion is the failure to pay taxes that are legally due. Evasion of taxes on gains and profits takes place when taxpayers do not declare their gains and profits to tax authorities or do not declare the full amounts. Evasion of import duties, excise duties and VAT taxes occurs when taxpayers do not declare imports or locally manufactured products or do not declare the full amounts, or when they under-value imports and locally manufactured products. I am not aware of any available statistics relating to the tax gap in Uganda, but I believe it could be as high as 50 per cent. The tax gap is the difference between the tax that the URA should collect from all eligible taxpayers in the country, and what they actually collect from the few that are compliant. This tax gap arises mainly as a result of taxpayers failing to file their tax returns, underreporting or understating their income, and in some case as a result of complete failure to pay what is genuinely owed to the URA. The biggest culprits as far as tax evasion is concerned in Uganda are mainly the traders and businesses in the informal sector of the economy. This sector is characterised mainly by cash transactions. One of the ways in which URA can work towards the reduction of the tax gap in Uganda is by bringing the informal sector into the country's tax net. The question is how can URA achieve this? The nature of the activities undertaken in the cash economy makes it difficult to quantify its size and impact on tax revenue. However, there is sufficient evidence to conclude that tax evasion by participants in the cash economy is a significant problem that denies the government billions of shillings in revenue each year. Revenue that could be funding improvements in welfare, health, education, infrastructure and other government programs. In order for URA to address the challenges presented to it by the cash economy and ultimately bridge the tax gap, a new tax administrative approach may be necessary. The cash economy may have to be addressed in a different tax compliance model from the formal business sector. This model could include an approach to compliance improvement, which encourages voluntary compliance by the community through a more cooperative and participative regulatory environment. Mr Kamulegeya is a tax partner at PricewaterhouseCoopers