Writer: Alice Nalweera. PHOTO/FILE/HANDOUT
From July 2025, newly registered businesses owned by Ugandans will enjoy a three-year income tax exemption. This applies to businesses with capital below Shs500m, according to the Ministry of Finance tax bill amendment presented in Parliament recently.
In a country, where it is a cliché that businesses do not see their fifth birthday, and taxation mentioned as one of the causes of their demise, the exemption will come off as one of the most pro-business interventions in recent times.
Significant questions will certainly linger: will this tax sweetener spur entrepreneurship verve and resilience for Ugandans? Or will it open the door to unintended consequences? The three-year income tax break aims to reduce financial pressure during the critical early stages of an enterprise.
This is expected to stimulate economic growth and attract investment, position Uganda as a more competitive destination for entrepreneurship. Startups and small enterprises are usually burdened by excessive costs for acquiring equipment, securing premises, and covering operational expenses.
The proposed tax exemption could provide much-needed relief enabling these businesses to reinvest their savings into expansion, technological upgrades, and workforce skilling, thereby strengthening their capacity to grow and compete. If implemented, the proposal will drive-up business formalisation, a crucial step to reducing informal business operations in the country.
Being a formal business comes with benefits, including access to credit, government tenders, and trust from suppliers. The potential to drive decent job creation is high as more businesses emerge and the perceived ‘harassment’ from the taxman is eliminated. Key sectors such as agro-processing, manufacturing, and services will be boosted further driving economic activity and employment.
Countries such as Ghana, Algeria, Kenya have successfully implemented similar policies to boost investment. By lowering the cost of doing business, the country could attract investors who might have otherwise considered alternative markets.
Despite these opportunities, the proposed tax break could be meaningless if other hindrances to business growth stay. These include road infrastructure bottlenecks, expensive and unreliable electricity, and the appetite for kickbacks from public officials, which collectively make it costly to do business in the country.
The tax incentive comes with a requirement to register business and file annual returns. These processes should be simpler for everyone. A major concern that the government should be aware of is the risk of businesses exploiting loopholes in the system.
For instance, some enterprises may engage in business mutation repeatedly re-registering under different names or identities to continuously benefit from the tax exemption beyond the intended three-year period.
This practice could undermine the policy’s objectives and create unfair advantages in the business landscape. A crucial measure is strengthening monitoring and compliance mechanisms to prevent tax abuse. Uganda Revenue Authority needs to establish digital tracking systems and conduct regular audits to ensure that only genuinely eligible businesses benefit from the tax break.
Additionally, creating a comprehensive database of businesses receiving exemption and linking them to national identification systems (IDs) could enhance transparency and enable better tracking of their activities beyond the exemption period. Undoubtedly, one can argue that the government will suffer short-term revenue loss due to the blanket tax exemption for new start-ups.
This is the opportunity cost that the government should pay to facilitate growth, employment, and eventually more tax.
The proposed three-year income tax break presents both significant opportunities and notable challenges. While it has the potential to stimulate entrepreneurship, attract investment, and drive job creation, its success hinges on effective implementation, robust oversight, and measures to ensure fairness and inclusiveness across all sectors.
By lowering the cost of doing business, the country could attract investors who might have otherwise considered alternative markets.”
The writer, Alice Nalweera, is a young professional at EPRC, Makerere University.
