Tough times force 60% of Ugandan businesses to close

Up to 55 percent of Ugandans who opened businesses in the past five years have closed them because of lack of capital, declining demand, high cost of inputs, Covid-19 disruptions, and heavy taxation.

This information is contained in a report of a national study done by a non-governmental organisation Twaweza, Uganda Revenue Authority (URA) and Tax Justice Alliance Uganda. 

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The study was done this year among 2,900 people between January and February and again among 2,761 people between April and May.

The report comes at a time when the Finance ministry is racing to raise Shs25.5 trillion of this year’s Shs48 trillion national budget through local revenue to reduce dependence on foreign borrowing and curb rising public debts. This requires an increase in local revenue to 17 percent, signaling a heavy tax burden for the few people who are still running businesses and the consumers even as the citizens grapple with rising inflation.

In the new report, which was released yesterday in Kampala, 45 percent of the respondents had owned at least one business in the past five years.

The majority of the businesses are small, opened in the last three years, and employed between one and 11 people, according to the report.

The main types of businesses owned by citizens are agricultural, wholesale/retail trade, hawking, and other small-scale services such as salons, brewing and selling alcohol, and trading in animals.  However, even the businesses that are still operating are either declining or stunted in terms of growth, according to the report and remarks by business operators.

“Roughly, the same number of owners operating businesses say their business is growing (36 percent) while some say they are declining (39 percent). The remainder says the business is neither growing nor declining (25 percent),” the report reads.

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Business owners are a little more pessimistic about the state of their businesses than was the case in late 2019 when the baseline survey was done.

“Poorer business owners, those aged over 55, those with lower levels of education, and those in Eastern and Northern regions are more likely than others to say that their business is declining. Business owners in Kampala are more positive about the state of their businesses,” the report indicates.

Ms Marie Nanyanzi, the senior programme officer at Twaweza, said business operators told them that the business environment is not friendly.

She said the reason is not entirely clear but it “may relate to the pandemic –with business owners seeing challenges in the wider economy, but not seeing reasons to lose confidence in their own business prospects.”

Mr Francis Kabuye, the head of the policy and advocacy federation of Small and Medium-Sized Enterprises (SMEs), said those who failed won’t bounce back to business.

“Most businesses are struggling. The number of enterprises that are declining are bigger than the number of enterprises that are improving,” he said.

He added: “I would urge the government to think about the provision of capital. In the past five years, very few businesses have been created because of the high cost of capital, high cost of production and starting up a business.”

Mr Isaac Arinaitwe from the Tax Policy Division of the Finance ministry, said they have availed money through the Uganda Development Bank for SMEs. The majority of businesses in Uganda are SMEs. 

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But Mr Kabuye said the money is not being accessed by SMEs because of complex processes.
On taxation, Ms Nanyanzi said 67 percent of the population said the taxation rates are not fair amid lack of transparency on collection. Thirty percent of respondents said they are willing to evade taxes if given a chance, meaning the majority are willing to pay taxes.

According to the report, the main reason given by people who avoid or evade taxes is that they feel the rates are too high, cited by close to half of citizens (46 percent). This is followed by a feeling that their income is too low (22 percent) and a sense that tax revenues are not spent efficiently by the government (21 percent).

Ms Nanyanzi said: “On taxation, there is some good news and some less good news here. On the positive side, there is high and growing support for taxation in principle, recognition that paying tax is a civic duty, and a falling number of people who say they would avoid tax if they could.”

Commenting on the findings, Mr Kabuye said corruption affects willingness to pay taxes. 
“Most of the SMEs want to pay taxes, they don’t want to evade taxes, but they want to see value for money. Where is the accountability? If you are collecting the money, how are you using the money?” he asked.

Mr Michael Masembe, the acting manager for tax education at URA, said the findings will be used to adjust the government approach to taxation.

Mr Robert Ssuna, a tax policy analyst and coordinator of Tax Justice Alliance Uganda, said the government should increase the tax base instead of increasing tax rates.

“Do tax rates lead to more tax morale? The motivation to pay taxes is also about service delivery and not necessarily the tax rates. Sometimes we consider that the number of people on the tax register is the tax base and yet it is the number of economic activities from which you generate tax,” he said.

“The government should focus on increasing the number of these economic activities by creating a favourable environment for businesses,” added.

According to the statistics from the Finance ministry, the revenue to GDP ratio has increased from 10.2 percent in 2014/2015 Financial Year to 12.9 percent in 2018/2019 Financial Year and a year-to-year average growth rate of 15.7 percent.

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However, the revenue performance was disrupted by the outbreak of the Covid-19 pandemic, with revenue in 2019/2020, registering a paltry growth of 3.05 percent and a decline in revenue effort from 12.9 percent in 2018/19 to 12.6 percent of GDP in 2019/20.

There was a slight improvement after the full lifting of the Covid-19 restrictions this year. The Finance ministry statistics indicate that there was a growth in revenue effort to 13.5 percent in 2021/2022 and it is projected to increase to 14.1 percent this financial year.

Mr Arinaitwe said they require an increase in local revenue to 17 percent.

“In the report, 42 percent of the youth indicated that Uganda has created an environment which is good to do business, then obviously, the level of economic activities will increase and hence increase the tax base.”