Government’s decade-long policy of granting tax holidays to selected investors is generating positive returns.
But a study suggests the benefits are concentrated in manufacturing and export agriculture, while construction, transport, and some service sectors are delivering little value.
The findings are contained in the Ministry of Finance Cost-Benefit Analysis.
The study examined the performance of firms benefiting from tax holidays between June 2022 and June 2025, drawing on URA tax data and other economic indicators.
It suggests that tax incentives appear to generate more economic benefits than they cost government, but remain unevenly distributed across sectors.
Tax holidays granted to firms in strategic sectors, the study indicates, generated an overall benefit-cost ratio of 2.49, meaning that for every Shs1 forgone revenue, Shs2.49 was generated.
Export-oriented firms performed slightly less strongly but still positively, generating Shs1.85 for every Shs1.
Manufacturing is a success story
The study found that manufacturing firms generated a benefit-cost ratio of 5.49, the highest among examined sectors, which means that for every Shs1, the economy gained nearly Shs5.49.
The sector was also among the largest job creators, employing 5,880 workers.
The study attributes manufacturing’s performance to its ability to generate value addition, support industrialisation, create employment, and stimulate demand across local supply chains.
Export-oriented agriculture
Agriculture, particularly export-oriented agriculture, also performed strongly, recording a benefit-cost ratio of 4.784, while agricultural firms recorded a ratio of 2.26, which together generated more than 4,400 jobs.
Experts have previously argued that incentives should support sectors capable of transforming the export base.
In sharp contrast, however, construction produced almost no measurable economic return despite benefiting from tax exemptions. The study found that construction registered a benefit-cost ratio of just 0.02, which means that for every Shs1 forgone, only two cents were generated with the employment of only 23 jobs.
Transport and storage performed even worse, with a benefit-cost ratio of zero and only eight jobs.
Several service sectors also performed poorly, with wholesale and retail trade recording a benefit-cost ratio of 0.95, while human health and social work activities recorded a ratio of 0.23, and other service activities recorded just 0.42.
The findings raise difficult questions at a time when government is under pressure to increase domestic revenue.
The study estimates that tax holiday beneficiaries generated substantial economic activity during the period, contributing Shs32.4b in pay-as-you-earn, Shs59.4b in domestic VAT, Shs219.9b in import VAT, and over Shs1 trillion in capital investment.
Combined, firms benefiting from strategic-sector incentives employed approximately 12,602 workers.
Exporter beneficiaries generated Shs6b in pay-as-you-earn, Shs5.7b in domestic VAT, Shs3.9b in import VAT, and Shs236.1b in capital investment and employed about 4,731 workers.
Yet the report cautions against assuming that all these benefits can be directly attributed to tax holidays, with the study finding evidence suggesting that some beneficiary firms were already larger, more productive, and more investment-ready.
The study also identified weaknesses in local value creation, noting that some beneficiary firms had consistently performed below government’s 70 percent local-input benchmark.
In some cases, local sourcing actually declined after firms received tax holidays, with some firms, instead of purchasing more inputs from local suppliers, increasing reliance on imported raw materials and intermediate goods.
The export results were equally mixed, with the report noting that while exporter beneficiaries generally outperformed non-beneficiary firms, there was limited evidence that tax holidays themselves were responsible for improved export performance.
This suggests that factors such as infrastructure, logistics, market access, financing, and production capacity could have played a more significant role in driving exports.
The Ministry of Finance, however, argues that the findings should not be interpreted as a case against tax incentives altogether, but rather as an informed approach to a more targeted and evidence-based method.
The study, therefore, recommends moving away from blanket tax holidays and replacing them with performance-based incentives tied to specific outcomes such as export growth, local sourcing, job creation, value addition, technology transfer, and investment levels.