The Value Added Tax (Vat) Gap Analysis for Uganda

Uganda’s public expenditure is growing at a fast rate due to the need to finance her National Development Plan (NDP) with the goal of attaining high middle income country status as envisioned in the Vision 2040. Consequently, Uganda’s stock of public debt, both domestic and external, to finance the NDP has increased significantly. This has been exacerbated by significant reduction in aid due to austerity measure taken by development partners to contain the impact of the 2009 international financial crisis that constrained fiscal space significantly. In this regard, Uganda has made commitments to step up its efforts to mobilise domestic resources to finance the NDP. Owing to its relative efficiency and effectiveness, the Value Added Tax (VAT) has been identified as one of the key tax head that could boost domestic resource mobilisation. However, the revenue productivity of Uganda’s VAT, as measured by its “C-efficiency”, is low when compared with other Sub-Saharan African countries. It is on this backdrop that this paper provides a comprehensive quantitative analysis of the gap between potential revenues and actual VAT collections, known as the compliance gap. This analysis generates evidence for Uganda Revenue Authority (URA) to monitor and identify what is contributing to its VAT gap. In addition, this paper estimates the policy gap. The policy gap refers to the impact on the potential yield of the tax due to exemptions, zero ratings, and other reductions to the potential tax base.