KACITA: Traders fear formalising businesses over tax burden

Uganda's push to expand its tax base and formalize businesses is being hampered by a significant trust deficit between traders and tax authorities, according to the Kampala City Traders Association (KACITA). Many entrepreneurs are reluctant to register their businesses, fearing they will become immediate targets for tax collection.

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Many traders want to register and formalise their businesses, but they fear that the moment they identify themselves, the taxman will immediately begin pursuing them.

Hajji Issa Sekitto, KACITA Chairman, stated that the country's strategy for business formalization prioritizes enforcement over incentives. This approach, he explained, inadvertently discourages numerous small and medium enterprises from joining the formal economy. "Many traders want to register and formalize their businesses, but they fear that the moment they identify themselves, the taxman will immediately begin pursuing them," Sekitto remarked during a dissemination event for the Economic Policy Research Centre (EPRC) Uganda Business Climate Index.

Contrary to the common perception that formalization increases tax obligations, Sekitto argued that remaining informal can be more costly. Registered businesses can claim input Value Added Tax (VAT) credits, offset withholding taxes, and benefit from various tax credits and exemptions. In contrast, informal traders often forgo these advantages because they do not file returns or maintain proper tax records. This means unregistered traders bear VAT as a direct cost and may face estimated tax assessments from the Uganda Revenue Authority (URA).

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By encouraging businesses to formalise, we are actually encouraging them to pay less tax than they are currently paying under informality.

Sekitto also raised concerns about the URA's handling of inactive businesses. He noted that once entrepreneurs obtain a Tax Identification Number (TIN), they often continue to receive tax reminders and assessments even after their businesses have ceased operations. He proposed that the URA implement a system to track business closures and inactivity, suggesting that such reforms would bolster confidence in the tax administration system. Tracy Akello, Manager for Domestic Tax at URA, responded to the concerns raised by traders.

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Businesses fail every day because of market conditions, capital shortages and other economic shocks. Once someone is no longer operating, there should be a mechanism for updating those records instead of continuing to issue tax demands.