How Govt Lost Shs1.4 Trillion in Tax Incentives - Auditor General Advises Tightening

The Auditor General has advised the Ministry of Finance, Planning, and Economic Development to restrict tax exemptions to businesses that strictly meet the criteria outlined in the tax laws. This recommendation comes after the release of the latest Value for Money Audit Report, which indicates that the benefits of tax exemptions and incentives are not meeting their intended objectives.

The report, prepared by Auditor General John Muwanga, evaluates the impact of tax incentives and expenditures on Uganda's economy. Despite the aim of these incentives to stimulate economic growth by freeing up capital for companies to expand and create jobs, the findings reveal significant underperformance. Of the 36 companies that received tax incentives, 22 failed to reach the 50 percent performance threshold in employment creation.

"The anticipated employment levels have not been achieved, with a majority of the incentivized companies not fully realizing the employment goals," the report states.

Substantial Revenue Losses

The audit uncovered that the government waived taxes amounting to Shs1.4 trillion over the review period. This includes Shs1.293 trillion waived under Parliament's Gazette, direct waivers of Shs118.5 billion by the Finance Minister, and tax exemptions totaling Shs5.576 billion granted by the Commissioner General under Section 21 of the Income Tax Act.

"There is no evidence that taxes written off outside the Gazette were communicated to Parliament for retrospective authorization," Muwanga noted, highlighting the significant revenue loss for the government.

Accumulation of Domestic Arrears

The Ministry of Finance had committed to paying taxes amounting to Shs553 billion on behalf of various taxpayers last year. However, the audit found that these commitments were not settled in time, leading to a buildup of domestic arrears, further complicating the country’s financial management.

Lack of Management Framework

The report criticizes the Ministry of Finance for lacking an approved framework to manage and monitor tax incentives and expenditures effectively. This gap has led to poor oversight and management, with many companies failing to meet the outputs specified in their memoranda of understanding (MoUs). Additionally, some tax incentives, such as Corporation Income Tax holidays, remain unutilized.

Challenges and Recommendations

The audit identifies several obstacles impeding the success of tax exemptions and incentives, including high electricity costs and unstable supply during peak hours, which limit production. Furthermore, competition from imported industrial inputs like pre-painted sheets and galvanized coils poses additional challenges.

To address these issues, the Auditor General recommends the Ministry of Finance:

1. Restrict tax exemptions to qualifying businesses: Ensure that only companies meeting the tax laws' criteria receive exemptions.
2. Develop a comprehensive management framework: Implement a robust framework to monitor and manage tax incentives and expenditures effectively.
3. Communicate all tax waivers to Parliament: Ensure transparency and accountability by seeking retrospective authorization from Parliament for all tax waivers.

In response, the Ministry of Finance is expected to review these recommendations and take necessary actions to align tax incentives with their intended economic objectives, thereby enhancing accountability and optimizing the benefits for the country's economy.

This detailed audit report underscores the need for stringent measures to ensure that tax incentives and exemptions yield the desired economic benefits and contribute to the nation's development goals effectively.