Uganda forgoes Shs5 trillion in tax exemptions

Uganda’s tax incentive regime is coming under renewed scrutiny after the government forewent Shs5.01 trillion in tax revenue in the 2024/25 financial year, raising questions about whether the economic benefits of exemptions justify the revenue sacrificed.

The figure, contained in a new study commissioned by the Uganda Revenue Authority (URA) in partnership with the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI-Uganda), rose from Shs3.6 trillion the previous year.

The latest revenue forgone is equivalent to about 16 per cent of the tax collected by URA during the year.

The study, titled The Cost-Benefit Analysis of Tax Expenditures in Uganda, examined administrative tax data, household survey information and other evidence to assess the costs and benefits of the country’s tax expenditure regime.

Presenting the findings, Mr Solomon Rukundo, a tax specialist at the Ministry of Finance, said a significant portion of the revenue forgone does not arise from investment incentives alone.

Instead, exemptions also benefit individuals, public institutions and households, making tax expenditure a broader fiscal issue than simply attracting investors.

“Tax expenditures are currently costing Shs5 trillion, about 2.2 per cent of GDP and 15.5 per cent of the tax collected,” Mr Rukundo said.

He said value-added tax accounted for about Shs2 trillion, personal income tax roughly Shs1 trillion, excise duty Shs853 billion, customs duty Shs708 billion and corporate income tax Shs431 billion.

The increase from the previous year, however, does not necessarily mean government introduced an equivalent volume of new tax exemptions.

Mr Rukundo said improved reporting, data collection and analytical methods could partly explain the sharp rise in the measured value of tax expenditures.

The findings nevertheless highlight areas where exemptions have become politically and administratively difficult to withdraw.

Personal income tax exemptions, for example, are highly concentrated among security personnel, retirement fund contributors and Members of Parliament, who together account for about 95 per cent of the personal income tax revenue forgone.

Participants at the launch questioned the continued preferential treatment of some high-income groups at a time when government is under pressure to mobilise more domestic revenue.

The study also highlights the long-running corporate income tax holiday granted to Bujagali Energy Limited.

The exemption, granted in 2017, has been repeatedly renewed and is expected to run until 2032.

Mr Rukundo said government has maintained the arrangement partly because Bujagali’s 250-megawatt power plant is one of the country’s major electricity generators and taxing the company could have implications for electricity tariffs.

Another contested measure is the income tax exemption for Savings and Credit Cooperative Organisations (SACCOs), which is due to expire in 2027. President Museveni has previously supported its retention.

Meanwhile, the number of companies benefiting from major investment-related tax incentives has risen sharply, from two in 2018 to 123 in 2025.

Income tax exemptions are the most widely used investment incentive, followed by exemptions involving VAT, excise duty and stamp duty.

Mr Rukundo said about half of the firms benefiting from the incentives were established after the current incentive regime was introduced, suggesting that some measures may have helped attract new investment and support business expansion.

The unresolved question, however, is whether the investment, jobs, exports and other economic activity generated by beneficiaries are sufficient to compensate for the revenue government gives up.

VAT expenditures are concentrated in mining, oil and gas, government projects, financial services and industry, while some VAT measures support household consumption of agricultural and other essential goods.

The Ministry of Finance says tax exemptions granted to oil and gas companies are expected to be removed once commercial production begins.

Corporate income tax expenditures largely benefit companies receiving tax holidays and sector-specific exemptions, with the 10-year income tax holiday for qualifying sectors accounting for the largest share.

The study also points to tax preferences that have not yet been fully quantified, including provisions contained in sector-specific regulations covering financial services, insurance and extractives, as well as instances where government agrees to pay taxes on behalf of private taxpayers.

Ms Shirley Kongai, chairperson of the real estate sector at the Private Sector Foundation Uganda, said weaknesses in the tax system also extend to parts of the informal economy.

She said many real estate brokers and agents remain inadequately captured despite their role in transactions that determine property values and related tax liabilities.

Ms Kongai attributed part of the problem to inadequate data, saying effective tax policy requires reliable information about economic activity and taxpayers.

Mr Ronald Nyenje Makumbi, URA’s manager for tax expenditure analysis, acknowledged the challenge posed by the informal sector, particularly the difficulty of obtaining reliable data.

He said URA would continue recommending policy changes aimed at improving tax administration and revenue collection.

The Ministry of Trade, Industry and Cooperatives is proposing a multi-sectoral unit to manage, monitor and evaluate tax incentives.

Mr Patrick Mugisha, the ministry’s Commissioner for Business Development and Quality Assurance, said different government institutions need to be involved because tax incentives affect businesses and individuals across several sectors.

Such a mechanism, he said, would help government determine which incentives should be retained, reformed or removed.

Ms Jane Nalunga, SEATINI Uganda executive director, said stronger oversight of tax expenditures is increasingly important as Uganda seeks to raise domestic revenue while pursuing its long-term economic ambitions.

With official development assistance declining and external economic pressures growing, she said government needs to establish whether every tax expenditure is generating sufficient economic and social returns.

The study therefore puts the focus not only on the size of Uganda’s tax incentives, but also on whether the country can demonstrate what it is getting in return for the revenue it gives up.