The Second Tax: How Corruption Eats Tax (And YOUR) Revenue

The Second Tax: How Corruption Eats Tax Revenue

By Crystal Kabajwara

Picture this:

Your company has built an excellent IT system worth $100,000. Perfect for a large organisation – a bank, a telecom, a manufacturing group, or a government ministry.

You approach the organisation. You are told there is no budget for it this year.

However, you are advised that other suppliers have also approached them. Getting it into next year’s budget will be “facilitated.”

You understand.

You pay 10% of the contract value to the person who ‘controls’ the budget.

Then comes procurement. Public or private, there must be competitive bidding. But since you paid to get it budgeted, you are almost guaranteed to win.

You win the $100,000 contract. You are now down $10,000, but the URA (Uganda Revenue Authority) doesn’t know this.

The $10,000 can neither be invoiced nor claimed.

The contract is to be delivered in three phases of $33,333 each. You have already paid $3,333 against each phase in what is euphemistically called “facilitation” or (smile) “securing your future”.

The Invoice That Needs a Push

You invoice for Phase 1 plus 18% VAT – $6,000.

You expect payment in 30 days as per the contract. It doesn’t come.

The invoice is stuck somewhere between delivery confirmation and the finance department. Someone needs to “push it.” He also wants 10% of the invoice value. You negotiate to a round figure of $3,000.

You have salaries to pay, an overdraft to service, and a promise you made to your family.

You agree.

When you finally get paid, you quietly send $3,000 to the person who pushed the file. You are now $13,000 out of pocket before you have even paid your staff, and you still haven’t remitted the VAT.

It is due by the 15th. What do you do? You look at your cash flow and say what every struggling businessman in Uganda has said:

“The VAT can wait. Let me risk the 2% URA interest. Next month I’ll cover it.”

So you divert the VAT to operations.

Phase 2 begins. You invoice again, thinking payment will be faster this time.

It is held up again, this time by a different approver in the same organisation. You thought the $3,000 was a one-off payment.

It wasn’t. You had set a binding precedent without knowing it.

By Phase 3, you are heavily indebted. You have borrowed more to deliver the project. The system must be commissioned before final payment.

That sign-off won’t be free either.

The Audit After the Launch

Finally, the organisation launches the system with fanfare. You are celebrated as the contractor. URA officials invited to the launch take notes.

The following week, you receive a comprehensive audit letter. First head: VAT. Then PAYE. Then NSSF also comes knocking.

The taxes you would have paid to URA went to the budget holder, procurement, the payments team, and the commissioning team.

Taxed Twice

Who is the real loser?

We keep trying to widen the tax base, but we are taxing the same base twice.

Once formally through the URA, and another informally through what I call Private Revenue Collection.

This second tax is unreceipted, unlegislated, and unapologetic. It is collected at every node of the business value chain – budgeting, procurement, payment, and commissioning.

This second tax is unreceipted, unlegislated, and unapologetic.

And it exists in both the private sector and the government.

In a private company, it is the procurement manager who wants a kickback to add you to the approved supplier list. In government, it is the officer who wants a fee to include you in the work plan.

In both cases, the effect is the same.

On a $100,000 contract, this private tax can easily reach 15% to 20%. No business can pay a 15% private tax, plus 18% VAT, plus 30% corporate income tax, plus PAYE and NSSF, and remain profitable.

Something has to give.

And what gives first is always URA, because URA does not hold your payment file hostage.

This is a major reason for Uganda’s tax-to-GDP ratio getting stuck below 14% despite aggressive reforms. We are diagnosing a compliance problem when we have a cash-flow problem created by corruption across the economy, not just in government.

The URA ends up auditing the symptom, not the cause.

The entrepreneur in my story did not start as a tax cheat. He started as a compliant taxpayer. The system, public and private, turned him into a non-compliant one.

Kill the Second Tax to Collect the First

If we are serious about Domestic Revenue Mobilisation, we must kill the second tax to collect the first.

Until we do this, we will keep launching systems with fanfare on Monday and issuing audit letters on Tuesday, wondering why revenue isn’t growing.

The real loss is not just the VAT. It is the entrepreneur who will never bid for any big contract again, public or private.

The bigger loser is the Economy as a whole – that’s all of us – you and I together.