A couple of weeks ago, the Forum for Democratic Change (FDC) party urged the government to reduce the Pay As You Earn (PAYE) rate of tax from 30 per cent to 5 per cent citing economic hardship on the tax payer.
I don’t know if this was an off-the cuff-comment or a policy statement by the party spokesperson Mr John Kikonyogo. But, there are better ways to address the high cost of living faced by the tax payer, at the same time ensuring that government revenues are not greatly impacted.
Government’s action plan
For example, one of the things the Finance Minister can do is to increase the Personal Tax Allowance which is basically the amount of income you earn before you start paying tax. Presently, this stands at Shs235,000 although, it has only been increased once (in 2002) since it was set at Shs130,000 in 1997.
It is important to remember that in the past 17 years, inflation has greatly reduced the purchasing power of the Shilling and if we assume a rate of 5 per cent since 1997, which happens to be the Central Bank’s inflation target, the threshold should now be at Shs297,960.
It is, therefore, plausible for the main opposition party FDC to suggest a tax allowance of say Shs300,000 considering that generally, inflation has been above the targeted 5 per cent in the last five years with a peak of 30 per cent in October 2011.
Narrow tax bands
The opposition party could also have suggested that tax bands be increased so as to apportion the tax burden fairly. In my opinion, our tax bands are still very narrow between the basic rate of tax at 10 per cent (Shs235,000) and the 30 per cent rate (Shs410,000).
I also believe that the higher rate of 40 per cent for those earning Shs 10 million and above a month should be adjusted to a threshold of Shs20 million.
This is because, although taxes raise revenue for government to provide public services, it is important that the tax burden doesn’t stifle economic activity by limiting the discretionary income of workers.
Impact on small busineses
This is because small businesses cannot thrive without domestic demand and for too long in my view, government policy has been focused on exports to international markets and not the domestic market.
It is those earning Shs10 million and above who will do more to boost our domestic tourism, invest in real estate or start-up a business thus creating the much needed jobs.
However, the key discussion many would like to see happening is how as a country we can increase our tax base presently at around 13 per cent. With an increased tax base more revenues can be realised, creating more room for maneuver for the Minister of Finance.
Currently, most private enterprises are still in the informal sector and as the census will soon reveal, our population is increasing at a fast rate which means increased demand for healthcare, schools and other public services.
Without plausible proposals on this matter, FDC will find it difficult to convince many that they can do a better job than the present government.
The writer is a business and finance analyst.
SOURCE: Daily Monitor