3.3 Tax Autonomy and Control

TABLE 3.3 Tax Autonomy and Control

Level ofgovernment

Comments and Who sets rate Who sets Who collects Who receives main issues and Tax and ceilings? tax base? taxes? yield? challenges

Income tax (pay as you earn) Central Central Central Central

Corporate income tax Central Central Central Central

Export-import tax and duties Central Central Central Central

Value added tax Central Central Central Central

Graduated tax Central, for rates Local, for Local, typically Local, with The yield has decreased significantly (approximated income and the tax bands identification through the revenue over recent years. It is hard to assess and wealth tax)a Local, for oftaxpayersc parish and sub- sharing between wealth in certain cases and define assessmentsb county chiefs, various levels people in the correct bands. Low capacity supported by (lower local and skills oftax collectors (such as appointed revenue governments the parish chiefs) are a problem. collectors receive 65%) Serious flaws (including lack of registration and corruption) exist in the enumeration and assessment process in most local governments. There is discussion ofabolishing this tax. 112

Jesper Steffensen

Property tax and tax Local, within a Central and Local, but collection Local, with Valuation done by chiefgovernment on immovable property ceilingd locale is sometimes revenue sharing valuer (centralized), which has led to privatized between various severe bottlenecks. The tax is under levels reform. Under the Rating Act, the ceiling might be reduced. The key to improved yield is decentralization of valuation and flexibility to set the rates, ability to collect a flat rate from buildings not yet valued, and the extent to which persons and institutions are exempt—combined with strong capacity building in the local governments.

Market dues Local Local Local, but Local, with revenue Multiple and overlapping dues and collection is sharing between charges exist. Equity in the administration typically privatized various levels and collection procedures is a concern.

Licenses Local Local Local, but Local, with revenue Handling ofthe contractors, especially collection is often sharing between delays, is a problem. Poor administrative privatized various levels practices exist in many local governments.

Other taxes A large number ofminor taxes and duties are collected by local governments (for example, bicycle tax).

Source: LGFC 2003 and various other sources. Note: The Local Government Amendment Act of2001, section 28 (amendment ofsection 81 ofthe LGA, states, “The minister may, by statutory instrument, and in consultation with the minister responsible for finance, declare the scale or rate ofgraduated tax to be levied by local governments throughout the country”). a. Levied on every male person 18 or older, and every female person ofthe same age engaged in gainful employment or a business. The LGA exempts certain groups ofpeople. The minimum tax is U Sh 3,000 per month and the maximum is U Sh 100,000, stipulated by the minister oflocal government. b. Assessment is typically done by the local government tax assessment teams, comprising technical stafffrom lower local governments. c. Typically registration and enumeration is done by the village and parish chiefs. d. There is a ceiling (0–20 percent ofthe rental value). e. The tax is levied on the rentable value ofland and buildings. The local government may grant complete or partial exemption from payment ofrates. Local Government Organization and Finance: Uganda

113

114 Jesper Steffensen

The grants were originally designed mainly to cover the recurrent budget.However,with the gradual decentralization ofthe development budget,especially after 1999/2000,development grants were introduced. They have characteristics ofboth unconditional and conditional grants.

In the first phases ofthe reform process,the costs ofthe decentralized services were not defined,and there has been continual discussion between the central government and local governments about the extent to which the grants have adequately compensated the additional costs (LGFC 2000b, 2002).Following is an overview oftrends in the composition ofthe grants.

The share ofunconditional grants has declined from 34.5 percent in 1995/96 and 24 percent in 1997/98 to 11 percent in budget 2003/04 (table 3.4).The conditional development grants have increased from 0 percent to 25 percent over the same period.Ofthese development grants,sectorspecific conditional development grants constitute the largest share (63 percent).Conditional recurrent grants have decreased a bit,but taken together with conditional sector-specific development grants,the total sector-specific conditional grants have increased,constituting 79 percent in budget 2003/04 (up from 75 percent in 1997/98).

Along with the rapid increase in the size ofthe grants,the number of grants and the earmarking ofeach grant have increased as well.The number ofgrants has increased significantly,from 12 in FY 1996/97,to 19 in 2000/01,to 37 in FY 2003/04 (26 sectoral and 11 nonsectoral grant schemes)—each with their own modalities,grant allocation formulas,and reporting systems (Donor Sub-group on Decentralisation 2001;OnyachOlaa 2003;Steffensen and Tidemand 2004).

Most ofthe transfers are directed toward the key areas ofthe Poverty Eradication Action Plan—education,health,roads,water,and production. These conditional grants take up 78 to 79 percent ofthe total transfers.Most ofthe nonsectoral development grants are used in the same areas,bringing total transfers to these five areas up to 85 percent ofall transfers.The remaining transfers are unconditional and other grants,which typically cover costs in the general administration.

The equalization grant is very small and constitutes only 0.4 to 0.5 percent ofall transfers (see table 3.4).

Unconditional Grants The unconditional grant was supposed to be paid to local governments to run the decentralized services.Although the grant has increased in nominal terms since 1997/98,it has decreased in relative importance,and it has been criticized for not tracking with the decentralization oftasks andresponsibilities