Boldly, PAYE (Pay As You Earn) is 30% levy pried off from employees’/workers’ monthly salaries.  While presenting budget proposals to the Parliamentary Committee on Trade Tourism and Industry on the 22nd April 2010, the Uganda National Chamber of Commerce and Industry proposed that PAYE be scrapped-with immediacy. Why?

For starters, just like graduated tax, hut tax and poll tax among others, PAYE is a mercantilist and colonial tax. It is a direct and non consensual tax and for the case of Uganda, not commensurate to public good/ priority services that tax payers expect in return from government. This tax which contributes 16% to the national treasury is shouldered by a paltry 4% of the population (employees in formal sectors of the economy- government and private sector!) This also means that 30 million people in Uganda are freewheelers! This tax has a negative bearing on productivity, economic growth and Growth Domestic Happiness on our country.

In my protracted conversations with professionals around the world on this matter, majority seem to flag a rather naïve narrative that there is no way any government can abandon this easy to collect and guaranteed revenue! That emerging economies like Uganda cannot survive without PAYE!

I recall Prof. Juluis Sen of the London School of Economics (LSE) who argued that my proposals would work in countries where tax management systems are fully developed. I partly agree with him. I am also comforted by the fact that countries like Honduras and the State of Qatar scrapped PAYE long ago and are shining. Even major economies where levies on personal incomes thrive, these taxes are tagged to social security- contributions to pension and provident funds.

I present the following scenarios on how scrapping this tax would do economic miracles for this country! Let’s take an example of employee/worker X who earns a gross monthly of 4,000,000UGX, and therefore pays 30% or 1,200,000UGX in PAYE to government every month!

Scenario A: 

If PAYE is scrapped and therefore employee X retains 1, 200,000UGX and we assume he/she spends his/her money on any sort of consumption, the foregoing means a rise in aggregate demand of the country. In simple terms, increased consumption of goods and services means that industries / factories will increase production, number of workers (job creation) and will pay more in corporate taxes to government. This situation also means that   worker/employee X will pay more VAT to Uganda Revenue Authority (For every consumption on consumer and even capital goods and services. VAT is factored and borne by the consumer). Most important of all, the consumer attains satisfaction and happiness. Since scrapping of PAYE means a bigger take- home package, the worker/employee is motivated and more productive at work station. This is good for the country.

Scenario B: 

Let’s assume employee X invests the 1,200,000UGX in stocks, poultry or piggery project/ enterprise.  The foregoing means that the government will earn from issuing license (KCC License if one operates in Kampala) and X will create 8 jobs or more at the business installation. There is a multiplier effect here that pushes more citizens in productive sectors of the economy and adjunct increment in the volume of trade in the country. If you look at this full circle, the government would indirectly collect more revenue from the above scenario as opposed to withholding 1,200,000UGX from X’s gross salary.

Scenario C: 

If employee X decides to save the 1,200,000UGX in any bank, he/she will consolidate saving and earn interest. He/she will quickly marshal capital finance to invest in small to Cadillac businesses, spread wealth and create employment.  The bank will increase its loan portfolio pool and thus pay more loan withholding tax to government. More borrowers translate into revenue to government earned on credit facility and bankable projects of borrowers.

The foregoing scenarios demonstrate that by scrapping PAYE, government will collect more revenue, increase productivity, create more jobs, spur economic growth and guarantee Gross Domestic Happiness.

Instead of relying on inhibitive tax regimes like PAYE, government should focus on widening the tax base using modernist and rational strategies that don’t hurt aggregate demand and productivity. In a country where majority employees earn peanuts and shoulder extensive social and economic burdens, such a tax –PAYE – is not exactly moral. To broaden the tax base, Government should not encourage selective tax exemptions and tax holidays for large firms. Government should also urgently create an incentive structure that would increase formalization of businesses in Uganda. 

Reducing informality would expand the tax base and allow government to increase resources for improving the investment climate and reduce the burden of taxation on the small formal enterprises on the country.To reduce informality, government must reduce the costs of becoming formal and increase the benefits/incentives of becoming formal. For instance, firms that become formal increase chances of access to finance from the formal banking system, allows entrance to higher value supply chains with large formal firms – for lucrative business. Formalization means that SMEs and Big firms will now have ability to seek refunds of their VAT expenditures.  The Uganda National Chamber of Commerce and industry will leverage its country wide business networks to deepen business formalization campaign.

Our proposal of expunging PAYE regime was stayed in Minister Bumba’s budget address to the Nation.  She however indicated that Income Tax Reforms are on the way. Uganda’s National Chamber of Commerce and Industry will continue to place this proposal on the table.

By Morrison Rwakakamba

Secretary General, Uganda National Chamber of Commerce and Industry (UNCCI).