A Makerere University economist has called on the Ugandan government to carry out an ICT sector tax reform, which, if implemented, is expected to spur the sector to new growth levels.

Prevailing high taxes affect investment in ICT, resulting in a lower uptake of services, said Dr. Edward Batte Sennoga at a symposium. The present tax policy leads to a reduction in direct investment by shareholders and a reduction in profit margins of ICT service providers as they strive to absorb taxes without passing the cost on to users, he added.

"Reduced uptake of services and the subsequent decline in sector investment may result in falling government revenues," Sennoga warned during his presentation, entitled "Challenges and lessons of taxation policy on ICT services."

A 2007 Deloitte study revealed that a cut in Uganda's excise duty from 12 percent to 8 percent on mobile services would lead to an increase in total tax receipts of up to 2.5 percent and an increase in GDP of 0.6 percent between 2007 and 2017.

"Modest reductions in taxes on phone services have the potential to generate substantial gains in demand, airtime usage and penetration rates," Sennoga said.

He also suggested a tax reduction or exemption for software development, maintenance and upgrade costs, and software license fees, given that these comprise the bulk of IT costs.

The government should develop a greater understanding of e-business taxation and tariff issues in order to create an appropriate policy, Sennoga said. Participation in international dialogue and coordination of tax policies is critical, he added, as an approach different from other countries could easily result in Uganda losing business to outsourcing.

The existing tax policy in Uganda exempts computer hardware and software from the 18 percent value added tax (VAT) and import duty. However, software development, maintenance and upgrade costs, and software license fees are not VAT-exempt.

Usage tax on mobile-phone services is 30 percent, while fixed-phone services attract a 23 percent tax. Other taxes include a 30 percent corporation tax, 10 percent import duty on landline transmission equipment and a 10 percent import duty on fixed-line sets. There is no import duty on mobile-phone transmission equipment and mobile handsets.

The IDG News Service is a Network World affiliate.