Research consultancy

OTT TAX AND ITS IMPACT ON EXPECTED REVENUE COLLECTIONS IN UGANDA

CHAPTER ONE

INTRODUCTION

1.0.Introduction

This study is an analysis of noted  tax regime changes; introduction of  new policies, amendments in regulations, and scraping off some of the existing processes of tax administration and the resultant tax revenue collection in Uganda. “A taxpayer who understands the importance of tax revenue in own state economy does not need stringent policies, regulations and administration, they will be willing to declare and settle their statutory obligations truthfully, “Taxation of Income & Consumption in Uganda” (Okuja, 2016) OTT taxation is considered to the independent variables in this study while tax revenue collection is the dependent variable. This chapter presents the background to the study, problem statement, the purpose of the study, the objectives of the study, the research questions, the hypotheses, the scope of the study, the significance, Justification and operational definition of terms and concepts.

1.1.Background to the Study

1.2.1 Historical Background

All states and governments across the world depend largely on tax revenue collected from citizens personal  and  business  incomes. In Africa, a large number of countries depend both on tax collection from within and donor aid/funds from developed countries. Accordingly, the East African community member states have more than 50% of their economies funded by donor aid. The government of Uganda has initiated a number of tax reforms over time geared towards transforming the tax structure to make it more competitive internationally and make tax administration more effective and efficient (The Constitution of the Republic of Uganda, 1998). The major reforms started in 1991/1992 by separating tax administration functions from the main civil service to form a semi- autonomous Agency (Uganda Revenue Authority – URA), followed by scrapping of sales tax in 1997 replacing it with Value Added Tax (VAT) which has fewer dictations and a broader base, restructuring the Income Tax Act to make it more competitive in 1997 (Bahemuka, 2001) and restructuring URA to make it more efficient and effective in 2005 (Bakibinga, 2006). In between, there was introduction of Pay As You Earn (PAYE) levied on individual incomes of persons earning salaried pays in the country.

Government of Uganda has introduced an OTT tax effective 1^st July 2018. The tax is an excise duty on OTT services and it is charged at a rate of UGX 200 per user per day of access (MTN Uganda Ltd, 2018). Services considered to be taxable include Facebook, Messenger, Twitter, Skype, Instagram, Snapchat, Linkedln, WhatsApp among others. G-mail and other mail applications are currently not considered as taxable OTT services (MTN Uganda Ltd, 2018).

1.2.2    Theoretical Background

According to Ibrahim Mujura’s theory of taxation, tax and taxation is a compulsory contribution to the state revenue, levied by government on personal incomes and business profits. This theory emphasizes the traditional principles of taxation and does not point out the form of taxation that is seen with Over-the-Top (OTT) tax where the tax is actually levied on personal expenditure rather than income or profits. The actual perception, actions and reactions drawn by OTT taxpayers is an issue of taxing subscriptions to internet connection which is a form of expenditure and has not been studied to give a clear view to individuals.

1.2.3    Conceptual Background

Tax and Taxation is the price that citizens or residents pay for the public goods and benefits provided to them by government. Tax revenue collection is the administration of measures and processes put in place, making them operational and effective thereby yielding results and presenting amounts of income in form of cashflows on book. Tax policies can be defined by the purpose. The primary purpose of any tax policy, and therefore a good tax system, is to raise the revenue needed to pay for government spending. Tax administration thus flows from the tax policies, regulations and their subsequent implementation.

1.2.4    Contextual Background

The desire to achieve a middle-class income status goal by 2040, part of the millennium development goals, steered the call for more tax avenues and creation of a wider base every financial year. A strong and sound economy is the desire of every country in the world including Uganda. Tax payment is the demonstration of such desire which is meant to be voluntarily by all income earners although some of these perceive this as a means of exploitation by the government. Income earners include; companies/corporations, investors, exporters, importers, traders and employees (Kwagala-Igaga, 2016). Tax revenue collection is a major source of revenue to the government of Uganda and as such is an important factor of development of the economy. African countries’ tax policies and systems rationally relate to the business ventures in such countries (Kibuta Ongwamuhana, 2011). An economy that enacts favorable and progressive tax laws and policies will definitely breed successful and financial healthy business organizations (Kevin Holmes, 1997). In the absence of well-organized and locally controlled money markets, Uganda, like other developing countries relies primarily on taxation to mobilize domestic resources. Typically, direct taxes levied on private individuals, corporations and property, make up a small proportion of total tax revenue. It is indirect taxes like imports duties, excise taxes and VAT that comprise the major source of tax revenue (Mugume, 2014).

1.2.Problem Statement

There appears to be an information vacuum regarding OTT tax and hence forcing Ugandans to find ways of circumventing payment of the tax. The flow from tax regime changes, polices and amendments leads to conclusions drawn by most Ugandan tax payers as a ‘means of exploitation by government.’ Some individuals claim that the need to overstay in power by the current political regime has led to introduction of more uncalculated taxes – the most recent being; mobile money 1% transactional tax and OTT tax of Uganda Shillings (Ugx) 200 per day on social media users. The above claims rotate around a thinking that government is using these avenues to collect more tax revenues from individuals so as to raise funds for using in the next cycle of political campaigns, solicit more war materials that may be employed by government to forcefully retain power in 2021. In July 2018, His Excellency Yoweri Kaguta Museveni, president of the republic of Uganda, was quoted to have mentioned that these, particularly OTT tax, were designed to reduce the spread of political “rumours’ propaganda on social media such as WhatsApp, Twitter and Facebook. This was then observed as being aimed at regulating the access and use of social media in Uganda. As noted, the overall response of potential and targeted taxpayers was poor as a big number of the population shunned mobile money noted by massive reduction in transactions and abandoning social media or looking for defiant alternatives such as use of VPN – a smart phone application that enables one to access social media platforms without paying OTT tax. Hence many decided to avoid paying this tax using other ways, thus possibly impacting on revenue collections.

1.3. The purpose of the Study

This study seeks to assess the general response of targeted potential taxpayers to the introduction of OTT tax and the tax revenue collections from this segment compared to government estimates.

1.4. Specific Objectives

• To evaluate the effect of compliance levels of OTT tax payers on tax revenue collections in Uganda.
• To assess the general attitude of taxpayers towards tax revenue collections in Uganda.
• To ascertain the effect of avoidance measures on tax revenue collection.

1.5.Research Questions

• What is the effect of compliance levels of OTT tax payers on tax revenue collections in Uganda?
• What is the general attitude of taxpayers towards tax revenue collections in Uganda?
• What is the effect of avoidance measures on tax revenue collection?

1.6. Hypotheses of the Study

• There are low compliance levels of OTT tax payers hence affecting tax revenue collections in Uganda.
• The general attitude of taxpayers towards OTT has affected tax revenue collections in Uganda.
• Taxpayers have adopted avoidance measures to affect tax revenue collection.

1.7.Conceptual Framework

Independent Variables                                                              Dependent Variable

OTT Tax                                                                                   Revenue Collections

1.8.Significance of the Study

This study will communicate the understanding of increasing tax policies to the implementers and the perceived revenue collection motive by the target taxpayers. It will assist tax policy makers to develop more descriptive tax regulations and have a clear focus for future planning and budgeting. It will also inform other scholars on the need to explore this topic and develop theories for further study.

1.9.Justification of the Study

The case for OTT tax is still a virgin area of study as the tax policy is still new and has not been undertaken by the previous researchers. It is thus expected to open the mind of the reader and myself on this tax element and guide more researchers to invest in the same.

1.10.     The Scope of the Study

1.6.1 Geographical Scope

This research is based on the central region of Uganda. Mainly the Kampala district and its surrounding areas: Wakiso and Mukono.

1.6.2  Sample

The respondents to this research will entail social media users and revenue collection records from URA, Ministry of Finance Planning and Economic Development in Kampala district. Other sources will follow from the data available for public consumption as published by the relevant bodies.

1.6.3 Time scope

The period of my research is expected to be from January to June 2020 and is expected to run through a period of six (6) months.

1.11.    Operational Definitions

• Tax

Tax and Taxation is the price that citizens or residents pay for the public goods and benefits provided to them by government. The government levies and collects taxes to meet the cost of administration, governance, security and for social and economic welfare of the society. A tax therefore is money collected by government from business or individuals directly or indirectly, for the purpose of providing public goods and services. Income tax is a direct tax charged on business income, employment income, rent income, pensions, investment income and so on. The main goal of income tax reforms has been to enhance collection by broadening the tax base while reducing the maximum rates (Kaliba, 2011).

• Tax Policies

Tax policies can be defined by the purpose. The primary purpose of any tax policy, and therefore a good tax system, is to raise the revenue needed to pay for government spending. This is achieved through maxims regarding good taxes, said to underlie a good tax system and are essential for the broad understanding of why one type of tax is preferred to another. These principles guide the government in designing and implementing an equitable taxation regime (Adam Smith, 1776).

• T.T (Over the top) tax

OTT services are defined to mean “the transmission or receipt of voice or messages over the internet protocol network and includes access to virtual private networks.

1.7.4 VPN’s

VPN’s are a common global method of accessing internet services while masking the nature of the internet service being used. VPN’s can be used to access OTT services and for this, government is considering subjecting VPN’s to OTT tax (MTN Uganda Ltd, 2018).

• Tax Revenue Collection

Tax revenue collection is the administration of measures and processes put in place, making them operational and effective thereby yielding results and presenting amounts of income in form of cashflows on book. The whole process begins from the inception of tax regulations, implementation and reporting results. The revenue collected will thus be set aside for government expenditure. In Uganda, URA is the body responsible for this collection and submission is to the Ministry of finance, planning and economic development. Tax and Taxation is the price that citizens or residents pay for the public goods and benefits provided to them by government. The government levies and collects taxes to meet the cost of administration, governance, security and for social and economic welfare of the society. A tax therefore is money collected by government from business or individuals directly or indirectly, for the purpose of providing public goods and services (Okuja, Joseph O, 2016).p