By KT Reporter
A new study by Uganda’s Ministry of Finance says the country’s 10-year tax holidays are delivering positive economic returns, but the benefits are not evenly spread. The analysis looks at whether the incentives given to investors and exporters are worth the billions of shillings Uganda gives up in tax revenue each year. Uganda currently forgoes an estimated 3.6 trillion shillings annually through tax holidays and other exemptions.
The government says the question has long been debated: do these incentives drive enough investment and jobs to justify their cost?
“The Cost-Benefit Analysis of Uganda’s 10 Year Tax Holidays for Qualifying (Strategic) Sectors and Exporters” was conducted by the Ministry’s Tax Department.
It was to determine whether Uganda’s 10-year tax holiday generates sufficient economic returns using the cost-benefit analysis and causal analysis.
It was based on the fact that many civil society payers and economists were wondering whether these incentives generate sufficient economic returns to justify their fiscal cost and whether the incentives contribute to Uganda’s broader structural transformation agenda. Its findings were released in the just-ended month.
The findings from the study indicate that at the aggregate level, the tax holiday generates a net benefi
According to the study, the answer is broadly yes, but with important caveats. On average, every shilling Uganda gives up through tax holidays generates about three shillings in benefits for firms in qualifying sectors, and about 1.85 shillings for exporters. However, the study reveals that there are sharp sectoral disparities with manufacturing and export-oriented agriculture delivering very high returns, while construction, transport, and certain services exhibit negligible or near-zero returns.
“Manufacturing and export-oriented agriculture have BCRs (benefit-cost-ratios) exceeding 5 and 4, respectively, while construction, transport, and certain services ave near zero returns indicating significant dead weight losses.”
Manufacturing stands out as the most efficient recipient of the 10-year tax holiday, according to the study.
Manufacturers in the qualifying sectors have a BCR of 5.49 and employed 5,880 people, while exporting manufacturers have a BCR of 1.59 and employed 2358 people.
Therefore, manufacturers generate substantial economic returns per unit of tax expenditure, reflecting strong value addition, deep backward and forward linkages and learning spillovers and productivity gains.”
The 10-year tax holiday targeted at agro-processing and export agriculture was also termed highly effective and aligned with other government objectives like the 10-fold growth strategy.
However, there is a scope for improvement when it comes to wholesale and retail trade, where the 10- year tax holiday has not shown significant benefit and has been subsidising a “risky activity that would occur regardless”, hence a dead weight.
Manufacturing and export agriculture deliver the strongest employment and growth impacts, while incentives boost firm sales and investment but show weak effects on exports, local linkages, and long-term tax revenue. The analysis recommends refining the targeting of tax holidays to maximize structural transformation and address fiscal trade-offs in Uganda’s economic policy.
The World Bank says exemptions and 10-year holidays erode the tax base and have not significantly expanded firm assets; beneficiaries just replace worn-out equipment rather than grow.
They want Uganda to reconsider raising domestic revenue. Uganda’s tax-to-GDP ratio is still low, at about 14 percent, “so UGX 3.6 trillion is money that could fund health, education, or infrastructure,” says the top lender in a statement.
Other experts point to revenue losses, weak additionality, where many investments might have happened with or without the incentives; limited structural transformation, and implementation problems like ambiguity, discretion, and poor monitoring.
Civil society and academics argue that the tax incentives regime in Uganda favours large and/foreign firms, creates harmful tax competition in East Africa, and shows little evidence of broad economic transformation or sustained local linkages.
Silver Namunane, World Bank Tax Economist, argues that the 10-year tax holiday has not succeeded in fostering significant growth in firms’ fixed assets.
Beneficiary firms show higher depreciation allowances (2.6 to 3.3 times those of comparison groups), suggesting they often replace existing assets rather than undertake major new expansions.
The Bank recommends rethinking exemptions to avoid eroding the corporate income tax base and undermining fiscal sustainability, warning that generous exemptions have failed to deliver an investment boom and risk making corporate income tax obsolete.
Aloysious Kittengo, Policy Analyst at SEATINI Uganda, argues that tax incentives cause high revenue losses, often trillions of shillings annually, with low additionality, while benefits are skewed toward large or foreign firms.
He calls for comprehensive cost-benefit analyses, ending harmful discretionary incentives, and prioritizing infrastructure, stability, and rule of law over tax giveaways.
-URN. Give us feedback on this story through our email: kamwokyatimes@gmail.com
