Small and medium-sized enterprises (SMEs) form the backbone of Uganda’s employment, innovation, and trade.
They sustain millions of livelihoods and contribute significantly to domestic revenue. Yet, beneath this entrepreneurial vitality IS a silent struggle, one that plays out each tax season.
The World Bank’s 25th Uganda Economic Update, under the cost of compliance subheading, brings out this struggle with SMEs during a stakeholder engagement, indicating that the tax system is complex, overlapping, poorly understood by most small business owners, and riddled with multiple layers of taxation.
This complexity, the report says, has made compliance not only cumbersome but also expensive, both in time and financial resources.
The report notes that the tax structure includes a wide range of levies, among others, income tax, VAT, excise duty, local service tax, trading licenses, and ground rent, which are administered through separate systems at central and local government levels.
For small businesses that lack the administrative capacity or financial literacy to navigate this maze, the system becomes more of a trap than a partnership.
Burden on the compliant
Ironically, the report notes, it is those businesses that try to comply that feel most penalized, which has made compliant taxpayers increasingly view themselves as easy targets as URA ‘focuses on generating more revenue from [SMEs] rather than finding ways to expand the tax base’.
‘Consequently, they feel they are being targeted as low-hanging fruit,’ the World Bank reveals in part of the report under which it canvassed stakeholder views on tax policy and administration. The tax base remains narrow, covering a small fraction of the country’s large informal sector.
URA focuses its efforts on those already within the system, with compliant taxpayers arguing that URA is fixated on extracting more from existing payers, a strategy SMEs say effectively treats them as ‘low-hanging fruit.’
For many SMEs, the report notes, staying compliant means enduring multiple audits and administrative reviews, while many others escape the tax net, which creates a moral hazard and non-compliance.
Uganda’s tax-to-GDP ratio of around 13.9 percent is one of the lowest in East Africa, well below government’s own target of 18 percent, which the World Bank attributes partly to a limited inclusion of informal enterprises, in addition to exemptions of large companies, which leaves smaller, less influential businesses to bear a disproportionate share of the fiscal load.
Simplifying and expanding
Thus, the World Bank urges government to simplify tax rules and expand taxpayer education, especially for SMEs that struggle to interpret complex tax laws.
Simplified compliance procedures, such as digital filing systems, harmonized tax codes, and user-friendly payment interfaces, could drastically reduce administrative costs.
The World Bank also wants government to build stronger collaboration between central and local governments, given that currently, both levels of government impose overlapping taxes that not only confuse businesses but also inflate compliance costs.
The report also recommends shifting from multiple issue-based audits to comprehensive audits, which would reduce redundancy and prevent unnecessary harassment of businesses, as well as build lasting trust to renew the social contract between government and taxpayers.
However, the report also notes that SMEs say that government should not focus on merely collecting more taxes, but be fair and efficient, without causing undue burden.
SMEs, which make up more than 90 percent of the private sector, feel crushed under the weight of administrative red tape or treated as cash cows for short-term revenue gains.
Instead, the report notes, they should be supported through an enabling tax environment that encourages growth, job creation, and innovation.
To widen the tax base, the World Bank argues that simplifying the tax regime, broadening the base, and improving transparency are essential steps that will reward compliance, and only by shifting from a culture of enforcement to one of partnership can government transform its tax system into a genuine engine for inclusive and sustainable growth.
URA yesterday said, they were intentional on addressing the issues raised in the report, noting that tax education and sensitization ‘is a priority and to ensure focus, a fully fledged division has been created to do the job down to the last person in the trade eco system’.
URA commissioner customs Asadu Kigozi Kisitu, said tax education and sensitization drives are already underway, in addition to simplification and harmonisation of processes and procedures such as obtaining a TIN and reviewing and harmonizing tax legislation not only in Uganda but EAC as a region.