Uganda’s economy is heavily reliant on small and medium-sized enterprises (SMEs), which make up over 90% of the private sector and contribute significantly to employment and income generation.
Despite their critical role in national development, small businesses face an uphill battle in navigating Uganda’s tax system. The structure, administration, and enforcement of taxes in Uganda disproportionately burden small businesses, stifling their growth and pushing many into informality.
Relatedly, owners of small businesses that attended last week’s Entrepreneurship Skills Development Program training by Enterprise Uganda at The Grandville Manor hotel Kiswa- Bugolobi, singled out unfair taxation and limited access to cheap credit as key impediments to the progress of SMEs in the country.
According to Ronald Magezi, a shoemaker in Wakiso, Uganda’s tax system is unfair to small businesses through its complex regulations, high tax rates, limited support systems, and inequitable enforcement practices, yet there is no window for rate negations or exemptions like it is the case with multinational corporations that set up operations here.
“We are operating under a very complex tax environment. The tax code in Uganda includes multiple types of taxes—such as income tax, value- added tax (VAT), withholding tax, local service tax and trading license fees, among others —each with distinct registration and filing requirements; all those weigh small businesses’ capacities down and hinders compliance,” he said in an exclusive interview.
The entrepreneur was concerned that, unlike large corporations that can afford professional tax consultants, small businesses often lack the resources to comply properly, leading to unintentional errors and penalties.
This complexity discourages formal registration, keeping many small enterprises in the informal sector and depriving the government of potential revenue. Compliance gaps among small businesses attract punitive penalties from URA, yet most of them are computed against assessment that is not based on factual data.
Failure to pay, the taxman keeps multiplying the tax burden up to a point when the burden is many times bigger that the size of the businesses and too big even to handle in bits.
Charles Ocici, the Enterprise Uganda executive director, pointed out that effort should be made to ensure the tax system creates a leveled ground in terms of assessment and enforcement such that payers are not discouraged to comply.
“Creating an uneven playing field where small businesses are taxed more heavily in relative terms or even businesses of similar nature but paying different taxes, those taxed more will lose the morale to comply with the tax obligation,” he said.
Ocici noted that taxation disparities are detrimental to the business systems because they create unfair competition based on pricing, where those that are taxed less tend to offer goods and services at lower charges, beating the highly taxed ones out of business.
He said entrepreneurs will be encouraged into complying with tax obligations when government lives up to its vital role and duty of adequately financing public services and infrastructure essential for economic development.
He encouraged salaried employees to direct a portion of their salaries into side businesses such that benefits from their pay are not constant but keep multiplied through investment, so that by the time they leave employment for one reason or the other, they already have a running investment.
Ocici also touched the issue of loans and encouraged participants to tread carefully on loans, because some loans can support business growth, while others can lead them into crumbling, depending on the type of loans acquired.
He advised them to take adequate time and study the loan offers, many financial institutions in Uganda offer loans with high interest rates, often ranging between 18% and 30% per annum. For SMEs with inconsistent cash flow, repaying these loans becomes a challenge, especially when revenue does not grow at the expected pace.
“You should compare lenders, fully understand all terms, and consider lower-cost financing options and make an effort to fully understand all the implications of the offers through scrutinizing documents before signing them,” he said.
