By Orla Ryan Uganda

A Ugandan villager goes to market to sell a pig.

First he has to pay for a movement permit from the local council, then a permit from the vet.

The plethora of local taxes and their maladministration is damaging local enterprise Ministry of Finance report

When he gets to market, he has to pay market entry, and finally - if he actually sells the pig - a tax on its sale.

Then the cycle starts again. The person who bought the pig pays a purchase tax, as well as a movement permit to take the pig from the market to his or her own village.

Leonard Okello is the project coordinator for the Uganda Participatory Poverty Assessment Project at the Ministry of Finance.

He uses this story to illustrate the folly of local government taxes on small business, the engine of Uganda's economic growth.

Stranglehold

Evidence is mounting that local government taxes are hurting small business badly.

In recent surveys, small business in Uganda has blamed unfair taxes for their poor profits and in some cases, their business failure.

People are angry about the taxes

"The plethora of local taxes and their maladministration is damaging local enterprise and undermining the credibility of government," a report by the Ministry of Finance published in December read.

It is the second participatory poverty assessment report.

Business anger at this situation is real. A woman in Butema, Bugiri, told the Ministry of Finance report: "I brew kwete (local brew) and take it to the market. I am required to pay dues for the same jerry can of kwete today and tomorrow if it is left over.

"Sometimes, most of the kwete is not bought, it is goes stale and I have to pour it away. I make a loss, yet I have paid all the market dues."

Taxed for nothing?

Behind the initial anger at the damage to their profits, there is a deeper anger at where the taxes that are being paid are actually going.

Where are the better roads and the new schools?

There are still some malpractices going on - all of this needs to be weeded out Dick Odur LGFC

Mr Okello said: "If I was a local business person, and I was not clear about the benefits of tax, any small amount of money paid is a burden."

In Workers' House in Kampala, sits the Local Government Finance Commission (LGFC) chairman Dick Odur.

The LGFC considers potential sources of revenue for local government and advises local governments on which ones to pursue.

The LGFC is taking a three-month countrywide look in January at local taxes and how they are collected. It hopes the exercise will weed out problems with the current tax system.

Abuse of the system

Mr Odur admits that the recent privatisation of tax collection could have made the matter worse.

Local governments depend on small business for revenue

"Even the private collector has tended to unfairly charge taxpayers to maximise his profit, we have had some murmurs of that.

"There are still some malpractices going on. All of this needs to be weeded out."

Mr Okello points out that most local authority discussions on the tenders centre on how much the private tax collectors will bring in, not how much can reasonably be expected.

This can put pressure on the tax collectors to increase their intake to meet targets and boost profits.

"The negotiations should be tied up with the status of the economy, basic projections and provisions for the possible shortfall," he said.

A workable compromise

Ultimately the problem is finding a balance between local government need to collect taxes and a business need to thrive.

For cash-strapped districts, the small business is an all too tempting target. As Mr Odur says, the "need for local revenues by local government is such is that the small trader in general is always the target of taxation".

Since decentralisation was introduced, local governments gets a certain amount of money from central government and have to meet the rest.

In the absence of any capacity to negotiate more strongly with central government, Mr Okello argues that pressure grows to target business.

But the irony is that in the short term, local authorities could be killing the goose that lays the golden egg - for the most sustainable source of revenue for local governments is business.