The case for regularly reviewing Uganda’s tax rate bands

December 17, 2024 in Finance, Opinion, Policy by Editor

Bwanika says the primary goal of indexation is to preserve the purchasing power of money over time, ensuring that income, savings, and investments do not lose value in real terms due to inflation.

There is a need through appropriate indexation to regularly review domestic tax bands in light of Uganda’s changing economic conditions writes Mastula Bwanika.

In fiscal policy, systematic indexation of individual tax brackets is crucial for equity and economic stability. As nations grapple with complex taxation systems, regular adjustments to tax brackets in response to inflation and economic shifts are increasingly necessary.

A tax band, or tax bracket, is a range of income levels subject to a specific tax rate. Indexation adjusts economic variables like salaries, taxes, interest rates, and government benefits to reflect changes in the cost of living, inflation rates, or other economic indicators. The primary goal of indexation is to preserve the purchasing power of money over time, ensuring that income, savings, and investments do not lose value in real terms due to inflation.

 Current tax bands

The last indexation of tax bands in Uganda was in July 2012. Since then, there has been no consideration for inflationary adjustments, eroding the purchasing power of salaried employees.

Like many other African countries, individual income tax rates in Uganda are structured progressively. With higher incomes, the tax rates increase, meaning that individuals earning progressively more income pay a higher rate. However those earning below UGX 235,000 are exempt from paying income tax. The current tax rates for individuals are:

• 10 pc for monthly income between UGX 235,000 and UGX 335,000
• 20 pc for monthly income between UGX 335,000 and UGX 410,000
• 30 pc for monthly income above UGX 410,000
• 40 pc for monthly income above UGX 10 million

The Impact of non-indexation

A closer look at our current situation reveals the pressing issue at hand. With a monthly tax-free income of UGX 235,000, amounting to a mere UGX 7,833 (currently just over $2) per day, the strain on low-income earners is palpable. When juxtaposed with the international poverty line of $2.15 per person per day, the disparity becomes even more glaring.

The workforce, especially the youth and university/college graduates, entering the job market, are among the hardest hit. Coupled with high unemployment and a competitive job market, the low tax bands automatically places their meagre salaries into the net which does not reflect the economic realities.

In most organizations, graduates join as interns with a typical starting salary ranging between UGX 400,000 and UGX 500,000. This is quickly diminished by a tax of approximately UGX 175,000, leaving a paltry sum for essential living expenses such as rent, transport, food, and nothing for savings or investment.

Lessons from other countries

In East Africa, Kenya adjusts its tax bands every year, serving as a regional example. However, Mauritius is often cited as having one of the most effective systems for the indexation in Africa. The Mauritian government consistently reviews and adjusts tax bands annually to account for inflation, maintaining the purchasing power of taxpayers and ensuring a fair and equitable system. This proactive approach has received international recognition from organizations such as the World Bank and the International Monetary Fund (IMF).

A way forward

For Uganda, the path to a more equitable tax system lies in the adoption of systematic indexation of tax brackets regularly, perhaps every three to five years, considering that tax amendments are enacted annually. This would not only prevent bracket creep, but also ensure that the system remains responsive to economic changes impacted by inflation and the general cost of living. Moreover, the government should consider broader tax reforms, such as raising the tax-free income threshold for persons in gainful employment from the current monthly threshold of UGX 235,000 to UGX 350,000.

Indexing individual tax bands can play a vital role in shaping a country’s tax system and promoting fairness and equity. As Uganda strives to achieve middle-class income status, the decisions made today will shape the economic landscape for years to come, with the potential to drive growth, reduce inequality, and foster a more inclusive economy.

Mastula Bwanika is a Tax Advisor at EY Uganda and the views expressed here are her own and not necessarily those of the company.