Is IMF wrong on taxation of Saccos?

Saccos in Uganda are a means of providing aid to people through access to loans; so, it is only fair Saccos are exempted from taxation since they provide financial services alternative to the formal conventional banking, writes DERRICK NAHUMUZA.

The International Monetary Fund (IMF) recently issued a report after conclusion of the fifth review of Uganda’s Extended Credit Facility Arrangement. The March 6, 2024 report made several recommendations on how Uganda can ensure maximum economic recovery following the disastrous effects of Covid-19.

The IMF, like the World Bank, is one of the Bretton Woods institutions that was created to reduce poverty by lending money to governments in low-developed countries with an aim of improving their standards of living. One of its core responsibilities is to monitor economic and financial policies of member countries and providing them with policy advice that is widely referred to as surveillance.

In carrying out its mandate, this Bretton Woods institution does routine reviews of a country’s policies and offers advice and recommendations flowing from economic discoveries made. Following the unfortunate events of Covid-19, IMF undertook to offer recommendations that would enable countries that had been grossly affected by Covid-19 gain an upward economic recovery.

It’s against this backdrop that IMF recommended the removal of tax exemptions on incomes from Savings and Credit Cooperation Societies (Saccos) in its fifth Uganda review report. IMF reasoned that removal of exemptions from incomes obtained by Saccos would create a near-term revenue reform priority that would boost corporate income tax collection. However, for several reasons, IMF got it wrong.

IMF is not the first institution to advocate for taxation of Saccos. On June 4, 2018, exactly one year after the exemption had been enacted, parliament received and consequently dismissed a proposal to reintroduce tax on Saccos. The exemptions had come in place in 2017.

It is indeed true that Uganda badly needs to streamline its exemption regime as a lot of revenue is lost in tax exemptions accorded towards investors and other individuals to attract in-bound investment. In fact, as of May 20, 2023, it was reported that government loses Shs 2.8 trillion in tax exemptions, a figure that could be higher in 2024 after the commencement of the new tax exemptions in July last year.

However, even with this in mind, exemption of Saccos from taxation is greatly justified and government should think twice before heeding to IMF’s advice. What IMF and other proponents of removal of the current exemptions need to understand is that Saccos in Uganda are a means of providing financial aid to people in rural areas.

Several Ugandans that are below the middle-income curve normally use Saccos as a means to access loans and funding for their establishments such as farming and other entrepreneurial businesses.

This boosts their only hope of earning a living and thus living above the poverty line. If IMF is indeed aimed at reducing poverty and improving standards of living, it would instead offer direct funding to these Saccos to ensure members a quick access to funds as this enables individual growth which catapults economic growth of the country.

Saccos, as their name suggests, encourage savings among individuals. As it currently stands, according to the Uganda Co-operative Savings and Credit Union Limited, Uganda has about 1,368 registered Saccos. Of the 1368 registered Saccos, the approximate amount of savings is about Shs 500 billion.

As opposed to formal banking system that only accounts for 14% of the population, majority of Ugandans have run to Saccos as their ‘banks’ of choice. This enhances Uganda’s staggering savings culture which, as of 2022, was indicated by a Finscope study to be standing at a paltry 54% with an average of Shs 6,000 being saved per annum.

The main attraction to save with Saccos has been the fact that there is no tax on these savings cooperatives. Once this exemption is removed and income from Saccos taxed, several Ugandans will be discouraged from saving and participating in the economic environment of Uganda which will result in membership withdrawal from these corporative. This would be disastrous to the country.

Besides, Saccos already contribute to national coffers by paying indirect taxes and non-tax revenue through operational licenses. The argument by IMF that removing exemptions would boost corporate income tax collections, therefore, cannot stand since Saccos are already contributing their fair share to the national coffers.

In their own element, Saccos provide an alternative banking system to several Ugandans especially farmers. Formal banks already enjoy a plethora of exemptions in the current income tax regime.

For example, there is no VAT charged on provision of financial services and payment of interest from a resident person to a resident financial institution is exempt from tax. If formal banks can be granted such exemptions, it is only fair that Saccos also benefit from the exemption regime since they provide financial services alternative to the formal conventional banking.

Exempting banks and not Saccos would discourage growth of Saccos with people opting to use banks. Additionally, the exemption to Saccos was capped to 10 years and is only valid till 2027. This, as envisaged by parliament, was sufficient time to enable Saccos grow, mobilize large numbers and boost economic growth. It is only pertinent that the remaining period is left to run.

The writer is an advocate of the High court