Uganda’s small and medium-sized enterprises (SMEs) are the backbone of the economy, employing millions and driving innovation. But a complex and costly tax system is holding many of them back.
In 2023, about 5% of Uganda’s gross national income came from international aid. With recent global aid cuts — including the winding down of the U.S. Agency for International Development (USAID) — the government is under growing pressure to raise more money locally through taxes.
Yet, less than half of Uganda’s national budget is financed through domestic revenue, while the rest comes from debt and donor support. This has pushed the government to tighten tax collection from local businesses — particularly SMEs, which make up over 90% of the private sector.
However, most of these businesses struggle under a complicated and time-consuming tax system that drains their limited resources and discourages growth.
A new study conducted by researcher Adrienne Lees in collaboration with the Uganda Revenue Authority (URA) surveyed nearly 2,000 SMEs to understand the burden of tax compliance.
The findings are eye-opening:
The average business spends about $800 each year on tax compliance — nearly 2% of its total revenue.
For smaller firms, compliance costs can exceed 20% of turnover, while large firms pay less than 1%.
Some small businesses spend more money filing taxes than they actually owe.
Much of this cost comes from labour time. Business owners and employees spend over 30 hours per month preparing tax documents and returns. Many entrepreneurs say this takes up a fifth of their working time, limiting productivity.
To cope, many firms hire external tax agents or accountants, spending around $54 per month on their services. While these agents help ensure accurate filings, they don’t necessarily reduce costs.
“The burden is heaviest on the smallest firms — those with the least capacity to comply,” Lees explains. “Many spend more time and money on paperwork than on growing their businesses.”
The complexity of Uganda’s tax system discourages entrepreneurship and innovation. Some people choose salaried jobs over starting businesses to avoid the stress of compliance. Others keep operations informal to stay under the tax radar — meaning the government ultimately loses revenue.
Moreover, around 30–35% of registered firms file “nil returns” each year — reporting no taxable income but still spending hundreds of dollars and hours on compliance.
In contrast, large corporations benefit from tax incentives and exemptions, costing Uganda an estimated $40 million in lost revenue every year.
Uganda’s parliament recently passed the 2025 Tax Amendment Bills, which aim to simplify compliance and expand the tax base. One proposal includes using the national ID as a Tax Identification Number (TIN) to make registration easier.
But Lees argues that bolder reforms are needed.
Adjust outdated tax thresholds.
The income levels that determine who pay taxes must have not been revised for over a decade. With inflation and changing business conditions, many tiny firms that make little or no profit are unfairly caught in the tax net.
Simplify tax forms.
The current corporate income tax return is designed for large corporations, not small family-run businesses. Simplifying forms would reduce errors and ease the workload.
Automate and pre-fill returns.
Using data from monthly VAT filings to automatically fill in parts of corporate tax forms could save hours of work. The URA’s new electronic invoicing system is a step in this direction — though it has faced pushback from some business owners.
“Instead of chasing small, struggling firms, Uganda could gain more by improving compliance among large companies and reducing waste from tax incentives,” Lees says.
Uganda’s economy depends on the energy and innovation of its small businesses. Making it easier — not harder — for them to pay taxes could unleash growth, attract investment, and strengthen public trust in the tax system.
“Simplifying taxes isn’t about cutting revenue,” Lees concludes. “It’s about making the system fairer, more efficient, and supportive of the entrepreneurs who keep Uganda’s economy running.”
