Precious S. Outwesiga
In the 2025 tax bills, the Ministry of Finance has proposed a three-year income tax holiday for newly registered businesses with capital not exceeding Shs500 million effective July 2025. On the surface, this proposal appears to be like a lifeline for budding entrepreneurs. The intention is clear—stimulate enterprises, promote job creation, and relieve financial pressures on startups in their critical formative years.
However, a closer look reveals a more sobering reality. Uganda’s startup mortality rate is high, with most businesses failing before their fifth anniversary. According to the Economic Policy Research Centre, the most significant barriers to the growth of small businesses include limited access to affordable credit, a lack of business skills, high levels of illiteracy, and poor business infrastructure. Navigating complex regulatory frameworks also poses considerable challenges for startups. This policy aims to benefit startups that register formally and are subject to income tax. Yet, the majority of Uganda’s micro, small, and medium enterprises (MSMEs) — those most likely to qualify—operate informally.
A 2022 World Bank report shows that over 50 percent of Uganda’s GDP is generated by the informal sector. Most informal MSMEs are not registered with the relevant government authorities and are not compliant with tax obligations; therefore, they neither pay income taxes nor benefit from exemptions, as they remain invisible to the taxman. This situation creates a paradox: a tax exemption offers no real benefit to these businesses unless they choose to formalize—a process that many startups find expensive and complex. Additionally, for those that do manage to register, profitability is rare in the early years. Many file nil tax returns and do not pay income tax. Therefore, granting them a tax holiday would offer relief from a tax they do not owe. If implemented, this proposal also poses a risk of abuse, as individuals may re-register businesses under new names to continually qualify for tax holidays. With weak enforcement mechanisms and limited data integration across government systems, closing such loopholes could prove challenging.
Without adequate oversight, the policy may result in allocative inefficiencies, benefiting a few opportunists who exploit loopholes rather than genuinely constrained startups. Furthermore, the incentive risks rewarding a small, formalized subset of businesses that would already survive and grow, resulting in windfall gains but tax revenue foregone by the government. Rather than narrowly targeting a small subset of formalized startups, the government should consider broader, more inclusive strategies. For instance, supporting informal enterprises to transition into the formal sector through simplified, low-cost procedures would have greater long-term benefits. Programs like the Taxpayer Registration Expansion Programme (TREP), which brings registration services directly to informal traders, are a step in the right direction.
At the same time, the government should place greater emphasis on reforms that address the foundational barriers faced by entrepreneurs. These may include improving access to affordable credit facilities, developing incubation hubs, providing business development services, improving market access, and enhancing access to low-cost electricity and digital infrastructure, especially in rural areas. The proposed three-year tax holiday is a well-intentioned gesture, but one unlikely to address the real pain points of Uganda’s startup ecosystem. As long as structural barriers to business success remain, the policy risks being bold on paper but ineffective in practice—offering relief from a burden that most startups do not yet carry. Only by tackling the foundational barriers can the government create an enabling environment where startups survive and scale into sustainable enterprises.
Ms Precious Stella Outwesiga is a graduate economist from Trinity College Dublin and a public sector enthusiast.
