Budget tax relief faces reality test as higher fuel, sugar taxes kick in

When the new financial year begins on July 1, many Ugandan workers will receive what government describes as tax relief through changes in Pay-As-You-Earn (PAYE) rates.

But even before the first payslips reflecting those savings are issued, questions are emerging about whether households will actually be better off.

The concern stems from a series of new excise duty measures that will simultaneously raise the cost of fuel, sugar, cooking oil, cement, motorcycles and several other goods and services that affect daily life and business operations.

The result is a policy contradiction that economists and private sector players are now debating: while government is reducing the direct tax burden on some workers, it is also increasing indirect taxes on products consumed by millions of Ugandans.

For many households, the real impact of the budget may therefore depend less on what they save through PAYE reforms and more on what they spend on essential commodities in the months ahead.

Revenue drive behind tax changes

The tax measures are part of a broader government effort to increase domestic revenue mobilisation.

Finance Minister Matia Kasaija’s budget and the accompanying tax amendment laws are expected to generate an additional Shs1.74 trillion in tax revenue during the 2026/27 financial year, while Uganda Revenue Authority administrative measures are projected to bring in another Shs3.16 trillion.

Together, the measures are expected to help government raise the country’s revenue effort to 15.5 percent of Gross Domestic Product (GDP), up from the current level.

To achieve that target, Parliament approved a raft of excise duty adjustments affecting both consumers and businesses.

Among the most significant changes is an increase of Shs200 per litre on petrol and diesel.

The government also doubled excise duty on certain spirits, increased motorcycle registration taxes from Shs200,000 to Shs500,000 and raised taxes on sugar, cooking oil, cooking fats and cement.

In addition, excise duty on single-use plastics has been expanded and significantly increased as part of environmental protection efforts.

While each tax adjustment may appear modest in isolation, business leaders argue that their cumulative impact could be substantial.

Fuel emerges as biggest concern

Of all the tax measures announced, the increase in fuel taxes is generating the greatest concern.

Fuel is not only consumed directly by motorists. It is a critical input in transportation, manufacturing, agriculture and power generation.

This means any increase in fuel costs is likely to ripple across the entire economy.

The timing of the increase has also raised eyebrows.

Global oil markets have experienced significant volatility following renewed tensions in the Middle East, including military confrontations involving Iran, Israel and the United States.

Those developments have already pushed up international oil prices, with local pump prices rising considerably in recent months.

Industry players warn that adding another Shs200 per litre in taxes could further increase transport and production costs.

Unless oil marketing companies absorb part of the tax increase, motorists are likely to pay more at the pump from next month.

The Uganda Manufacturers Association (UMA) says the move comes at a particularly sensitive time for businesses.

UMA Tax Policy Consultant John Jet Tusabe argues that many countries facing rising global fuel prices have responded by reducing fuel taxes to cushion consumers and businesses.

“Other countries are intervening by reducing taxes on fuel, yet Uganda is increasing the taxes. This will reverse the recently made economic gains because fuel is a vital input across all sectors,” he says.

According to manufacturers, higher transport and energy costs could ultimately make Ugandan products less competitive in regional markets.

Cost of living worries

Beyond fuel, households are also expected to feel the effects of higher taxes on everyday commodities.

Sugar, cooking oil and cooking fats are among the products targeted by the new excise duty measures.

Government increased excise duty on sugar from Shs100 to Shs300 per kilogram.

Cooking oil excise duty was raised from Shs200 to Shs400 per litre, while a new duty of Shs500 per litre or kilogram was introduced on cooking fats and fatty acids.

To policymakers, these taxes are part of a broader strategy to increase revenue collection.

To consumers, however, they translate into higher household expenditure.

Critics argue that these products are not luxury goods but essential items used daily by millions of Ugandans.

Moureen Wagubi, Executive Director of the Institute for Social Transformation, says the burden is likely to fall hardest on low-income households.

“These taxes affect low-income earners most, including families that struggle to afford basic household necessities,” she says.

According to Wagubi, the impact extends beyond individual consumers.

Small businesses that depend on sugar and cooking oil as production inputs may also face higher operating costs.

These include roadside chapati vendors, snack producers, juice processors and numerous other micro-enterprises that form a critical part of Uganda’s informal economy.

“When the cost of inputs rises, businesses either absorb the losses or pass the costs on to consumers,” she says.

Giving with one hand?

The tax increases come at the same time government is implementing reforms aimed at reducing the PAYE burden on lower- and middle-income earners.

Starting July 1, the tax-free monthly income threshold will rise from Shs235,000 to Shs335,000.

Government has also introduced a new middle-income tax band intended to reduce taxation on some workers.

The reforms have been welcomed by tax experts as a long-overdue adjustment of a PAYE structure that had not been revised for more than a decade.

However, critics question whether the benefits will survive rising consumer prices.

Jane Nalunga, Executive Director of the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI Uganda), argues that the two measures appear to be working against each other.

According to Nalunga, while government is allowing workers to keep slightly more of their salaries, it is simultaneously increasing taxes on products that consume a significant share of household budgets.

“Government has raised the PAYE threshold, which gives low-income earners some savings, but it is taking away those gains through higher taxes on essential goods,” she says.

The concern reflects a broader debate about the balance between revenue mobilisation and household welfare.

Businesses fear inflationary pressure

Private sector players warn that the combined effect of higher fuel and commodity taxes could trigger wider inflationary pressures.

Since transportation costs influence the prices of nearly all goods in the economy, any increase in fuel costs is likely to be passed along supply chains.

Manufacturers fear higher production costs.

Traders fear reduced consumer spending.

Consumers fear rising prices.

Economists note that while the government’s objective is to increase domestic revenue, excessive taxation can sometimes produce unintended consequences by reducing demand and slowing economic activity.

The challenge for policymakers will be finding a balance between raising revenue and protecting household purchasing power.

The real test starts next week

For government, the new tax measures are intended to strengthen revenue collection and reduce dependence on borrowing.

For households and businesses, however, the focus is likely to be much simpler.

Will the tax savings from PAYE reforms outweigh the higher prices resulting from new excise duties?

The answer may become clearer in the weeks following implementation of the new budget.

What is already evident is that while workers may receive slightly larger payslips from July, many will also face higher costs at fuel stations, supermarkets and local markets.

Whether they emerge better off overall remains one of the biggest questions hanging over the new financial year.