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Uganda's informal sector is a powerhouse, contributing an estimated 49% to the nation's Gross Domestic Product (GDP) and providing livelihoods for over 60% of the working population.
Despite its economic muscle, this vast segment of the economy largely operates outside the formal tax system.
This widespread non-compliance is a major headache for the Uganda Revenue Authority (URA), as it severely undermines efforts to boost domestic revenue and widens the country’s tax gap – the difference between what should be collected and what actually is.
The informal sector is a diverse landscape, encompassing everyone from bustling market vendors and ubiquitous boda-boda riders to roadside mechanics, small-scale manufacturers, and various informal service providers like welders, tailors, and food vendors.
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Many of these individuals and businesses earn substantial incomes, yet they typically operate without official registration, rarely file tax returns, and often lack proper financial records.
This lack of formal documentation makes it incredibly difficult for the URA to enforce compliance and monitor their activities effectively. The URA’s taxpayer register paints a stark picture: out of more than 2.5 million economically active Ugandans, fewer than 700,000 are registered for tax purposes, and even fewer submit their annual returns.
A 2021 study by the Economic Policy Research Centre (EPRC) highlighted this further, revealing that over 85% of informal sector businesses remain outside the URA's radar, despite many earning above the annual taxable threshold of UGX 10 million.
The Dual Impact: Lost Revenue and Unfair Competition
This tax gap creates a twin problem for Uganda. Firstly, it means lost revenue that could otherwise fund essential government services, from healthcare and education to infrastructure development.
Secondly, it fosters an environment of unfair competition for businesses that do comply with tax laws. Imagine a registered hardware store in Mbarara, diligently issuing electronic fiscal receipting and invoicing system (EFRIS) receipts and paying Value Added Tax (VAT).
They must then compete directly with an informal trader selling the very same goods tax-free from a temporary stall nearby.
This non-compliant operator can undercut prices, discouraging other businesses from formalising and distorting the entire market playing field.
As a tax investigations officer, I've personally encountered cases where individuals manage entire fleets of taxis, own multiple rental properties, or control sizeable inventories, yet remain unregistered or falsely claim to earn below the tax threshold.
Many also deliberately avoid banking their earnings, preferring cash transactions to evade detection.
URA's Evolving Strategy
To tackle this pervasive issue, the URA has been proactive, expanding its Taxpayer Register Expansion Programme (TREP). This initiative directly targets informal businesses for registration through door-to-door mapping exercises, mobile registration vans, and user-friendly digital platforms.
Crucially, collaboration with local governments and municipal councils has been strengthened, granting the URA access to licensing data, which helps identify potential taxpayers who might otherwise go unnoticed. Technology is also proving to be an indispensable tool in tracking informal sector income.
The URA now leverages mobile money transaction analysis, integrates with utility providers like UMEME (electricity) and NWSC (water), and even uses satellite imagery of business premises.
These advanced tools help to estimate the true economic scale of businesses previously considered "too small" to tax, bringing them into sharper focus for compliance efforts.
Ultimately, the long-term solution isn't solely about aggressive enforcement, but also about simplifying the compliance process itself. Many informal operators cite the complexity of tax forms, a fear of penalties, and a general lack of understanding as primary reasons for remaining outside the formal system.
While initiatives like the presumptive tax regime and the Small Business Taxpayer Office (SBTO) are positive steps, there's a clear need for more targeted taxpayer education campaigns.
Formalising the informal sector isn't intended to punish small businesses; rather, it's about fostering fairness and ensuring the long-term sustainability of national development. Everyone must contribute their fair share. As the URA continues to strengthen its enforcement strategies, informal businesses must understand that deliberate non-compliance is tax evasion – and eventually, the law will catch up with them.