From CPA Zuriat Nakayenga, Senior Tax Advisor
Adam Smith, “The Father of Business,” argued that taxes should be proportional to how much a person benefits from living in society.
A good tax system is one that ensures that any tax is invented so that it goes as little as possible beyond what it brings into the public purse.
It is, therefore, a system that generates enough revenue but causes minimal overall sacrifices for people and minimal obstacles to incentives to produce, just like the honey bee, which collects nectar from the flower without harming it.
In early July 2018, a dark cloud fell over internet users who mainly use social media for advertising and communication. The UGX 200 excise tax was introduced as a payment for over-the-top services (“OTT”) including social media platforms such as Twitter, Facebook and WhatsApp et al. According to the consumption tax law.
The guideline stated that OTT services included applications or apps that offer voice and messaging services over the Internet.
In his address, the President of the Republic of Uganda stated that the UGX 200 excise tax on what he calls “Lugambo” (literally “gossip”) among social media users who exchange opinions, prejudice, insults and friendly chats, should go out.
The government of Uganda planned to have total sales between 400 and 1.4 trillion UGX per year.
The introduction of OTT followed the introduction of a 1% excise tax on mobile money transactions.
The social media tax has been criticized by various groups and has led to people taking to the streets to demonstrate against the tax because it was unfair to Ugandans.
To avoid the social media tax, most Ugandans chose to use the Virtual Private Network (“VPN”) and wireless networks in offices.
Several humanitarian organizations raised concerns that the social media tax was a tool to restrict freedom of expression and denied Ugandans their basic human right to use the internet freely.
The justification for introducing the social media tax was that the government needed money to further develop infrastructure in rural areas.
Three years later, the government, aiming to generate UGX 284 billion in social media revenue by 2019, was only able to register UGX 49.9 billion, which is only 17.4% of projected annual revenue.
Regarding the principles that economists have established that policy makers should consider when setting tax laws such as convenience, economy, simplicity, and solvency, the government should consider dropping this excise tax from UGX 200 on OTT services.
One of the reasons is that it is a consumption tax that can be avoided, as evidenced by the number of taxpayers currently using VPN to evade the tax.
Second, the way the tax is paid is rigid. A taxpayer is only allowed to pay daily, weekly or monthly, which has resulted in more VPN usage and lower tax payments.
Obviously, the government has failed to achieve its goal and the tax is now a deadweight loss as the demand for internet usage, especially for low-income earners, has declined.
The telecommunications industry has been negatively impacted in the form of lost revenue from Internet data consumption, and the system of collecting and managing the social media tax contradicts Adam Smith’s four maxims of an effective tax system: fairness, safety, convenience, and efficiency.
In response to the underperformance of the social media tax, the government is now proposing to lower the social media tax under the Excise Tax Act 2021 (amendment) and introduce a 12% levy on internet data.
The bill proposing the introduction of a 12% excise tax excluding data used for the provision of medical and educational services was presented by the Minister of Finance, Economic Planning and Development Hon. Matia Kasaija in front of the parliament.
The proposal aims to counter the effects of the social media tax introduced in 2018 in order to make the collection of tax relief data more efficient than the heavily bypassed social media tax.
With the approval of the President, this tax will come into force on July 1, 2021.
While the government can restrict tax avoidance on data, data usage in the economy will drop dramatically.
The tax will make internet data consumption quite expensive for an economy recovering from the economic crisis caused by tough COVID-19 measures and the imposition of non-essential activities.
The likely tax burden in the circumstances of an Internet data tax would be on the end user, as telecommunications companies are free to pass a larger percentage of the tax burden on to the end user.
However, this depends on how the end user perceives the demand for internet data. If we think we can do without internet data, we will see another migration of users leaving the service.
What Ugandans should expect when the tax is finally passed is either an increase in the price of internet data or a decrease in the amount of internet data, or both, depending on what telecommunications sees as a more practical way of managing customer reactions.
One could argue that if the economy is struggling to recover from the COVID-19 disruptions, the government should stop introducing excise taxes now, and focus on efficiently collecting the taxes that already exist by giving taxpayers efficient ways to do so Settling tax liabilities and strengthening progressive taxes.
To avoid further roar and backlash from the public, the government should consider cutting both taxes, which are unlikely to generate the revenue it needs.