Source: The Conversation – Africa – By Adrienne Lees, Researcher, Institute of Development Studies
Uganda is one of the countries most exposed to recent cuts in international aid, particularly with the dissolution of the US Agency for International Development (USAID). In 2023, about 5% of gross national income – a measure of a country’s total income, including income from foreign sources – was received in aid.
The cuts have given new impetus to the drive to increase taxes raised from domestic businesses.
Less than half (45%) of the Ugandan budget is financed through domestic revenue. The remainder is funded largely through debt and budget support (grants) from bilateral and multilateral donors. Corporate income tax makes up around 8% of total domestic revenue. Firms also collect employee income tax (pay-as-you-earn), value added tax, excise duties and fuel duties.
Small and medium-sized enterprises (SMEs) contribute a small share of overall corporate income tax collection. But they make up over 90% of the private sector. The economy is heavily reliant on these firms for employment and growth.
These businesses struggle to navigate an increasingly complex tax system.
The complexity of Uganda’s tax system makes for a time-consuming tax filing process, compounded by low taxpayer knowledge and high levels of distrust in the Uganda Revenue Authority. The time, money and effort incurred by taxpayers to meet their tax obligations adds to their total tax burden.
These compliance costs also have real economic consequences. Firms might miss out on tax benefits or artificially constrain business growth to avoid greater reporting requirements. Since smaller firms are more constrained in their ability to document revenues, accurately calculate tax liabilities and file returns, they might even pay more tax than necessary.
At the margin, compliance costs affect the economic choices people make: the fear of high compliance costs might induce a potential entrepreneur to take a salaried job instead of starting a new business.
Relieving this burden could unlock greater productivity and growth, and encourage innovation and investment.
For my PhD in economics I collaborated with the Uganda Revenue Authority to generate detailed measures of tax compliance costs, using data from a survey of nearly 2,000 taxpaying SMEs. My research finds that the burden of compliance is significant, even for firms with very little tax revenue to contribute.
Solutions should focus on making compliance easier and ensuring that tax thresholds are set appropriately to exclude unproductive small firms.
The burden
The median firm faces total annual compliance costs of about US$800, equivalent to just under 2% of turnover. These costs are also highly regressive: smaller firms face costs exceeding 20% of turnover, versus less than 1% for the largest firms.
A more troubling result is that many firms, and particularly smaller ones, spend more on completing their tax returns than they pay in actual income tax.
Much of this burden stems from labour time. Employees and firm owners dedicate over 30 hours a month on compliance-related activities, primarily compiling tax documentation and preparing returns. For firm owners personally involved in tax compliance, this responsibility consumes around 20% of their working hours, on average.
Somewhat surprisingly, the amount of time spent on tax compliance does not increase significantly with firm size.
To compensate for limited tax knowledge, many firms use the services of a tax agent. These include external accountants, consultants, or other tax specialists who assist with tax compliance. My research finds that the use of agents is common across all taxpayer categories and is primarily driven by a desire to ensure proper compliance, rather than to minimise tax liabilities.
Although these agents do not necessarily reduce compliance costs, since firms spend an average of US$54 per month on agents’ fees, related research shows that they have a broadly positive impact on the quality of tax returns submitted.
What can be done
The Ugandan parliament recently voted on the 2025 tax amendment bills, with measures aiming to bolster revenue collection and simplify compliance. For instance, policymakers propose to use the national identity document as a taxpayer identification number, rather than requiring separate tax registration.
But policymakers should consider bolder actions.
Read more: Uganda’s tax system isn’t bringing in enough revenue, but is targeting small business the answer?
Firstly, the administrative thresholds for corporate income tax and presumptive tax (a simplified tax on business income for the smallest firms) have not been adjusted for over a decade. In a high inflation environment, this means that the tax system is capturing many firms with very little profit, and no tax to pay. Yet, these firms still bear compliance costs, and the revenue service incurs administrative costs registering and monitoring unproductive taxpayers.
Roughly 30% to 35% of firms filing returns each year file a nil return, meaning that they report zero on all significant fields of the tax return. Even these firms report compliance costs of, on average, around US$500 per year.
Read more: Uganda study shows text messages can boost tax compliance: here’s what worked
Rather than chasing the “little guy”, bigger revenue gains are likely to come from focusing on the largest businesses. For instance, research shows that tax incentives and exemptions cost Uganda over US$40 million in lost revenue per year.
Secondly, the Ugandan corporate income tax return is particularly long, complex, and more suited to the business structure of very large firms, rather than the SMEs making up most of the Ugandan economy. In addition to changing the thresholds, simplifying the return would be beneficial.
Read more: Wealthy Africans often don’t pay tax: the answer lies in smarter collection – expert
Filing processes could also be eased through automated pre-filling, for instance by using information from a firm’s monthly VAT returns to pre-populate parts of the corporate income tax return. The rollout of the Uganda Revenue Authority’s electronic invoicing system for VAT is a promising step in this direction, although it has been met with resistance by taxpayers.
– Uganda’s tax system is a drain on small businesses: how to set them free
– https://theconversation.com/ugandas-tax-system-is-a-drain-on-small-businesses-how-to-set-them-free-258120
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