With the 2025/26 National Budget coming off as debt-heavy, the government's legroom to spend is constrained.
This is because out of Shs37 trillion projected revenue domestically, nearly Shs27 trillion will go towards paying off a fraction of public debts that the government has been borrowing on your behalf.
So, this leaves just about Shs10 trillion to work with, which national budget analysts say limits government’s capacity to deliver social services and invest in infrastructure development.
One of the reasons that often goes under the radar, yet is largely responsible for revenue leakages after illicit financial flows (IFF), is the continuous granting of tax exemptions and incentives by the government to foreign investors and individuals who do not see through their part of the bargain.
Like the IFFs, uncalled for tax incentives which are becoming a fixture in Uganda, hinder the country’s ability to domestically mobilise resources to fund her budget.
According to the Auditor General, the government loses at least Shs1.4 trillion annually in tax incentives due to the indiscriminate and often unwarranted granting of tax exemptions.
This is equivalent to about three times the funds the government spent on commitment fees over the last six financial years. Commitment fee is a charge levied by a lender to a borrower, like Uganda, for reserving a specific amount of credit or a loan, even if the borrower does not use the full amount.
The estimate of lost revenues in tax incentive and exemption, according to Ms Jane Nalunga, an investment treaty analyst, is a conservative estimate considering the government's unchecked tendencies of granting tax breaks, something she says is akin to granting a blank cheque.
In the financial year 2023/24, the value for money audit report on the management of tax incentives and expenditures, the Auditor General found that 22 out of 36 companies performed below the 50 percent threshold. Contrary to what the companies promised, they underdeliver in several key requirements, including job creation, decent pay and transfer of technology.
A report titled: ‘Impact of harmful tax incentives and exemptions,’ authored by Ms Nalunga, Ms Regina Navuga, Mr Bernard Omoding, Mr Aloysius Kittengo and Mr Sam Tumugarukire, found out that the societal costs of tax exemptions are high and that the benefits, in terms of additional investments, are low.
Accordingly, tax specialists, CSOs and development partners, including the International Monetary Fund (IMF) and World Bank, have warned African governments, including Uganda, about tax exemptions. Despite these warnings, the practice of granting exemptions persists across all African governments.
In Uganda, on average, at least Shs1.5 trillion is lost every year in tax exemptions, according to the authors.
These exemptions, which are not provided for by statute, primarily take the form of the government paying taxes on behalf of an investor.
An investigation by Parliament’s Budget Committee discovered that the majority of the agreements between these companies and government on which these payments were based were either not grounded in the law or lacked supporting evidence.
Rationalising incentives
Given that the government is not prepared to abolish tax incentives and exemptions, plans are now underway to ensure more transparency by being open about the purpose and structure of the incentive. Accountability, which will include providing a means to measure the success of the incentive to avoid unintended consequences, will be part of the fixture should this come to pass.
In the Budget Speech for Financial Year 2025/2026 at Kololo Independence Grounds, the Finance Minister, Mr Matia Kasaija, noted that for the next financial year, just days away, the government will focus on improving tax administration to raise an additional Shs1.8 trillion. Additionally, the newly introduced tax measures are projected to raise Shs538.6 billion to increase domestic revenue.
Mr Kasaija revealed that the government will rationalise tax exemptions to eliminate inefficient ones that do not support business growth and the economy. This has been the Auditor General’s call.
According to the budget speech, the measures include addressing issues like typographical errors, outdated references, or inconsistencies (technical amendments) to tax laws aimed at improving clarity and consistency, creating a fairer and more predictable tax environment for businesses and taxpayers.
Simultaneously, the government is also looking at removing ambiguities that create loopholes, leading to revenue leakages. These amendments are also intended to enhance tax administration, encourage voluntary compliance, and empower the Uganda Revenue Authority (URA) to enforce tax laws.
Should the aforementioned become reality, no doubt there will be limitation on tax expenditures - revenue losses attributed to provisions in the tax law laws that allow for special exclusions, exemptions, deductions, or credits often seen as “loopholes” that benefit certain individuals or businesses who don’t return the “favour” by way of generating sufficient jobs or passing over technology to the locals despite being granted generous tax breaks among many other benefits.
Revenue shortfall
URA has consistently fallen short of revenue collection targets over the last 10 years. In FY2023/24, only Shs27.8 trillion was collected against a target of Shs29.9 trillion. With just a couple of days left before the curtain draws on the current FY2024/25, URA still needs to collect at least Shs4 trillion to meet its FY 2024/25 target of Shs32 trillion.
Mr John Musinguzi Rujoki, URA’s Commissioner General at of the beginning of this month was optimistic that nothing is impossible.
However, tax analysts including Mr Aloysius Kitengo, also a member of the Tax Justice Alliance Uganda, say it will be a “miracle” if URA hits the revenue collection targets, considering rife revenue leakages in the form of IFF and unnecessary tax incentives and exemptions.
Such recurring shortfalls risk compelling the government to increase borrowing to bridge funding gaps, thereby worsening the country’s already concerning public debt levels of Shs116 trillion.
Despite these persistent shortfalls, revenue targets continue to rise. For example, in FY2025/26, the revenue target has increased to Shs37 trillion, up from Shs32 trillion in FY2024/25.
Should the government make efforts to rationalise tax expenditure, then dishing out exemptions will be on conditions tagged to how many jobs will be created, transfer of technology, and decent wages, whose terms and threshold if breached, should be terminated midway following midterm reviews and performance.
Recommendations
As a way forward, dm Money has gathered that unfair tax exemptions must be stopped. Exemptions that favour certain categories of taxpayers over others, yet they are in the same market field, should be avoided.
If exemptions are to be given, they should target a particular sector and not specific taxpayers.
If tax exemptions are to be granted, they should be directed toward entire sectors rather than individual taxpayers, ensuring fairness, transparency, and broader economic impact.
If exemptions are to be granted, statutory exemptions should be favoured over discretionary executive incentives, as they tend to be less distortionary.
For any exemption, either statutory or from the executive should follow well-laid-out guidelines just as the Auditor General and Civil Society like SEATINI, OXFAM and CSBAG are calling for. But Uganda currently lacks clear guidelines on tax exemptions.
According to the Auditor General’s reports, there are no clear guidelines for granting exemptions nor are there routine reviews of the impact or benefits accruing from tax incentives, exemptions and holidays that justify their continued existence. For that, the Auditor General recommends that these guidelines should be developed and made public going forward.
Their views
“Our economy is still young, but with massive aspirations yet meagre revenue streams for the government to generate sufficient revenues to finance important social services that citizens demand. That is why the government entices investors with sweeteners such as incentives, tax holidays, or even waivers. The challenge is government is compelled to forfeit revenues after attracting investors for up to 10 or 15 years thereafter and that takes a toll on the Treasury.
If these exemptions support, for example, industrialisation hence spurring the economy, then that is great. But this has not led to an improvement in the quality of jobs available. Many employed Ugandans remain engaged in informal, low-paying work often at the ‘Jua-Kali’ level, which prevents them from contributing to the National Social Security Fund (NSSF), putting their future retirement security at serious risk,” says Mr Moses Talibita, a lawyer working with Uganda National Health Consumers Organisation.
