Uganda should leverage its tax policy to foster business growth and sustainable devt

By Mark Mutumba 

As Uganda strives to achieve its development aspirations as envisioned in its development plans and strategies, taxation can play a critical role in shaping the business environment.

Beyond its traditional role of generating revenue, tax policy defined - as the governments’ approach and framework of decisions and strategies regarding the design, implementation and administration of taxes serves as a key determinant for investment and trade in addition to influencing economic behavior.

Crucially, by considering the 4Rs (Revenue, Redistribution, Regulation and Representation) of taxation, governments can design tax systems that achieve multiplegoals beyond just revenue generation. Indeed, when strategically designed, tax policy can promote business growth, foster innovation and drive sustainable development.

Uganda ‘s tax register comprises of 4.5 million taxpayers but only about 16.5% are significant contributors to the country’s tax revenue .This small group of value taxpayers bears the bulk of the tax burden, while sectors like agricultures contribute less than 1% to the total tax revenue.

The heavy reliance on small formal tax base places undue strain on the few taxpayers ultimately constraining business growth and economic sustainability in the long run.

Given the significance of wholesale and retail sectors in Uganda’s tax revenue portfolio accounting for 26 percent of total revenue collected for the past 3 years, it’s clear that the business community plays a significant role in the revenue mobilization. The recent trader protests over underscore an important lesson: taxes can become a major barrier to business growth if the public perceives the tax system to be flawed or inefficient.

Such a perception can quickly transform taxation from a development tool into a source

of frustration and hardship.

As we approach the beginning of the budget cycle for the Financial Year 2025/26, the country is at a critical stage in its fiscal policy formulation process. During this period, the country once again has the opportunity to evaluate the current tax policy regime to identify and address the existing tax administration challenges while at the same time formulate policies that are responsive to some of the issues raised by the traders in the recent tax protest.

One of the key demands is the revision of the USD 3.5 special duty rate on textiles.

Traders argue that current market conditions not only make the cost of doing business high, but this steep levy also increases prices for the final consumer. Additionally, local manufacturers are unable to sustain supply levels sufficient to meet demand. Therefore, a compromise must be arrived at to revise the specific duty rates as the country builds its capacity to meet market demand.

Setting of the VAT threshold is a critical component in crafting an effective VAT regime. A low threshold often pulls small-scale businesses into the tax net, posing challenges for the tax administration in terms of management and enforcement.

To align with administrative capacities and economic realities, the government should consider

raising the VAT threshold, this however should be carefully calibrated to ensure it harmonizes with the broader tax policy, particularly the presumptive tax regime.

More still, such an adjustment should be accompanied with voluntary deregistration of tax

payers who fall below the new threshold, ensuring a smooth transition and preserving the integrity of the tax system.

In the same spirit, it is crucial for Uganda to reassess its tax incentive regime to ensure it effectively supports business growth, particularly for small businesses, and enhances

their competitiveness.

Recent discussions regarding planned tax waivers for eight taxpayers, alongside the extension of waivers on interest and penalties until December 31st, 2024, underscore the need for more precise criteria in granting such benefits.

While Section 43 of the Tax Procedures Code Act outlines the parameters for qualifying for tax waivers, terms like "hardship and  impossibility to pay" remain ambiguous.

To ensure fairness and transparency, these criteria must be clarified to guarantee that all taxpayers have equal access to these remedies, free from the risk of undue influence.

In conclusion, while taxes may never return to individual taxpayers in equal measure, it is crucial to establish a clear link between taxes paid and the public goods and services provided.

By delivering tangible benefits such as improved infrastructure, enhanced services that facilitate daily operations, and a supportive business environment public trust and tax compliance can be significantly strengthened.

This approach also lays the foundation for formulating economically sound policies that stimulate economic activities, ensuring both macroeconomic stability and microeconomic growth.