Uganda tax holidays delivering gains but expose sector gaps – study

KAMPALA — Uganda’s 10-year corporate tax holidays are delivering overall economic gains but remain uneven across sectors, with manufacturing and export agriculture driving the strongest returns, a new government analysis shows.

A cost–benefit study released by the Ministry of Finance’s Tax Policy Department finds that for every shilling of revenue forgone under incentives for strategic investors, the economy gains UGX 2.49 in benefits. Export-oriented firms generate UGX 1.85 for every shilling in tax relief.

The report, covering the period 2021/22 to 2024/25, concludes that while the incentives broadly work, their impact varies sharply by sector and raises questions about fiscal efficiency.

Manufacturing leads gains

Manufacturing emerged as the most effective beneficiary of the tax holidays, with a benefit–cost ratio exceeding 5, supported by strong value addition, job creation and linkages across the economy. Export agriculture also posted high returns, driven by integration into international markets and relatively low capital requirements.

In contrast, sectors such as construction, transport and some services showed negligible or near-zero returns, suggesting that tax incentives in these areas may be subsidising activity that would have occurred regardless.

Jobs created but quality varies

The study estimates that firms under strategic sector incentives employ about 12,600 workers, while exporters account for roughly 4,700 jobs.

However, analysts caution that much of the employment growth reflects pre-existing strengths of beneficiary firms rather than the direct effect of the tax holidays. Job quality also differs significantly, with more durable and productive employment concentrated in manufacturing and agro-processing.

Growth without strong fiscal returns

The report highlights a disconnect between firm growth and tax revenue. While beneficiary firms record strong increases in sales and investment, the corresponding rise in tax payments is modest and short-lived.

This suggests that tax holidays may be reducing effective taxation to the extent that expanding profits do not translate into sustained government revenue—an important concern in a revenue-constrained economy.

Weak export and local supply impact

Although the incentives boost investment and sales, their effect on exports and domestic supply chains is limited.

For strategic sectors, the study finds no clear causal link between tax holidays and improved export performance. At the same time, firms rely heavily on imported inputs, with local sourcing remaining below the 70 percent benchmark in many cases.

“This weakens the intended multiplier effects and limits broader structural transformation,” the report notes.

Call for targeted reforms

The Ministry of Finance recommends shifting away from broad tax holidays toward a more targeted, performance-based approach.

Proposed reforms include focusing incentives on high-impact sectors such as manufacturing and agro-processing, linking benefits to measurable outcomes like export growth and local sourcing, and introducing stricter monitoring and exit mechanisms.

Low-performing sectors such as construction and transport could see incentives scaled back or removed altogether.

Balancing growth and revenue

The report concludes that while tax incentives can support firm expansion, Uganda must refine their design to better align with development goals and fiscal sustainability.

“Tax incentives help firms, but improved targeting is necessary to achieve both growth and revenue objectives,” the study states.

The findings are likely to inform ongoing policy debates as government seeks to balance investment promotion with domestic revenue mobilisation.