A report by the World Bank has revealed that the current trend of granting tax exemptions, particularly to large firms and now to new small businesses by the government, poses a significant threat to Uganda’s tax revenues.
The report shows that exempting large firms, which typically contribute a substantial portion of total tax revenues, leads to budget deficits and reduced funding for public services.
‘This creates an uneven playing field, disadvantageously compliant, tax-paying firms and fostering resentment. The proposed Income Tax Amendment Bill, 2025, which intends to exempt new small businesses for three years, further exacerbates this issue,’ it indicates.
It further states that when both the largest and smallest firms are exempt, the tax burden disproportionately shifts to middle-compliant firms. The report adds that exemptions form a significant portion of the corporate income tax base.
This means the government must rely more heavily on the remaining tax-paying firms to meet revenue targets. It adds that this leads to more frequent audits, and higher penalties for these firms, contributing to the perception of URA’s ‘high-handedness’.
Mr Qimiao Fan, the division director for Kenya, Rwanda, Somalia, and Uganda Africa Region, says the tax holiday was intended to stimulate new investments or reinvestments by large firms, but has not succeeded in fostering growth in firms’ fixed assets.
‘Beneficiaries’ depreciation allowances are 2.6 to 3.3 times higher than those of comparison group firms, indicating that benefiting firms are more likely replacing worn-out assembly lines or adding minimal infrastructure rather than significantly expanding assets,’ he said, adding that the Ugandan government should rethink its tax exemption policy.
Continuing the current path risks undermining the integrity and sustainability of the entire tax system. Specifically, eliminating the 10-year tax holiday could improve tax revenues by a minimum of Shs101.57b or 0.1 percent of GDP.