A critical look at the new social media tax

Uganda introduces tax on social media

This year’s budget (FY 2018/19) is estimated at UGX 32, 367.49 billion, of which UGX 22,258.796 billion is for appropriation and UGX 10, 108.633 billion is for statutory expenditure.

The annual budget for FY 2018/19 exceeds the approved budget for FY 2017/18 (UGX 29,008.5 billion) by 11.6%, indicating that government demand is to increase in the economy.

The main contributor to this increase is government consumption rated at 5.8% and investment at 4.1%. This points to a mismatch between investment and consumption in many least developed countries (LDCs).

This year’s budget is coming at a time when Uganda’s tax revenue to GDP ratio is low, estimated at 14%, compared to its optimal potential of 20 % of GDP and a set target of 16% in the second National Development plan. It should be noted that Uganda’s budget in nominal terms has been expanding over the last decade. A look at national budgets since the enactment of the Public Finance Management (PFM) Act in 2015 shows that the approved budgets for the last three financial years (FYs) have averaged UGX 29 trillion.

As a way of increasing tax generation in the country, a number of tax proposals have been made. Interestingly, one of themis the social media tax passed by Parliament on 30 May 2018.  By virtue of this tax, Uganda Revenue Authority (URA) will collect money from telecom companies which supply data to all mobile phone users with social media.

How is this tax controversial?

The new law will impose a mandatory UGX 200 (US $ 0.052) daily levy on every user of the Over the Top S (OTT) services eg WhatsApp, Facebook etc. The tax which will be collected by telecom companies on behalf of URA is expected to raise UGX 284 billion in FY 2018/19.

This tax, however, comes with an intrinsic element of double taxation. This could occur when a customer has dual Sim cards, especially where both lines have internet bundles. Another paradox relates to when an individual has no credit on the line yet the line has bundles. Won’t this increase non-compliance with the tax requirement, thereby leading to low tax collection? In addition, it might be difficult to distinguish between those using the Over-the-top (OTT)  services  for research and gossiping  since  these  platforms have been adopted by  for example farmers to market their produce as well medical practitioners   in health to   recommend referrals.

With the emerging innovations in communication technology, this tax is doomed to be amenable to collection only in the short run, especially where one chooses to use Virtual Private Network (VPN), rendering the implementation of this tax cumbersome.

In that regard, government ought to look more at long-term and sustainable sources of tax revenue.  There is a need to ensure that all the gaps and leakages in the collection of the tax are plugged.

The issues of giving many tax exemptions and holidays to foreign investors should be reconsidered. Where possible a cost benefit analysis need to be undertaken on such firms that have enjoyed these exemptions to establish their contribution to the economy.  Also, more effective efforts should be made to instil the spirit of compliance in the taxpayers by ensuring value for money in all projects undertaken using their taxes. Short of this, a historical paradox – growth without transformation – might continue affecting our country.

Richard Ssempala- Knowledge Management Officer- SPEED Project- Makerere University School of Public Health.

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