Tax Reform and its effects on small businesses in Uganda: A sectoral analysis

Ayoki, Milton (2006): Tax Reform and its effects on small businesses in Uganda: A sectoral analysis.

Abstract

This study examines the impact of Uganda's tax regime on small and medium enterprise (SME) growth across five key sectors—agriculture, manufacturing, tourism, telecommunications, and financial services. Using a novel combination of marginal effective tax rate (METR) analysis, firm-level survey data from 892 SMEs, and administrative tax records from the Uganda Revenue Authority (URA), we assess how tax instruments, rates, and administrative practices influence investment decisions and competitiveness. Our findings reveal substantial sectoral heterogeneity: METRs range from 2.4% in agriculture (due to extensive exemptions) to 19.4% in tourism (from non-refundable VAT and licensing fees). While presumptive taxation successfully reduced compliance costs for micro-enterprises, poor threshold calibration, outdated exemption schedules, and overlapping local-central tax mandates continue to constrain growth. High compliance costs—averaging $510 annually even for nil-return filers—deter formalization, with 68% of eligible SMEs remaining outside the tax net. International comparisons show Uganda's SME tax burden exceeds regional peers Kenya and Rwanda by 3-5 percentage points. The paper develops a transaction cost-based analytical framework integrating behavioral public finance insights to explain the persistent gap between tax policy intent and SME outcomes. We conclude that revenue-neutral reforms focused on digital compliance tools, graduated incentives linked to formal status, and simplified presumptive rates could increase SME contributions to GDP by 1.8% while raising tax compliance from 32% to 54% over five years.

• Item Type: MPRA Paper
• Language: English
• Keywords: SME taxation, Uganda, tax compliance costs, informal sector, marginal effective tax rate, developing countries, digital tax administration.
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development

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