New tax proposals could hit the poor and small firms

Mobile money operators also highlighted the effect of digital transaction taxes on usage, noting that higher costs are already prompting some consumers to revert to cash

Kampala, Uganda | JULIUS BUSINGE | Uganda’s proposed tax measures for the 2026/27 financial year have drawn criticism from civil society groups, business leaders and mobile money operators, who warn they could raise living costs, strain small businesses and exacerbate inequality.

The concerns were raised at a press conference in Kampala on April 9, where stakeholders reviewed draft tax amendment bills ahead of the June budget reading for the next financial year that begins on July 1, 2026.  The government is seeking to raise about Shs2.3tn in additional domestic revenue as it looks to fund public spending while maintaining fiscal stability. The government has proposed a Shs84.2 trillion budget for the next financial year, up from Shs72.3 trillion.

While acknowledging the need for revenue mobilisation, critics cautioned against a growing reliance on consumption and transaction taxes, arguing that such measures tend to weigh more heavily on low-income households and smaller enterprises.

Spillover effect

The Civil Society Budget Advocacy Group said proposed increases in excise duties on fuel, sugar and cooking oil would have broad spillover effects across the economy.

“These measures will significantly increase the cost of living,” said Julius Mukunda, the group’s executive director. “Fuel is a cross-cutting input, so any increase will translate into higher transport, food and production costs across the board.”

Mukunda warned that the package leans heavily on indirect taxation. “Low-income households spend a larger share of their income on basic goods and services. By relying on consumption taxes, the burden is effectively shifted onto the poor, deepening inequality,” he said.

Business representatives said the proposals could undermine the viability of small and medium-sized enterprises, which account for a significant share of employment and output.

John Walugembe, executive director of the Federation of Small and Medium-Sized Enterprises, said higher input and transaction costs risk pushing firms out of formal operations.

“SMEs are already operating on thin margins. When you increase taxes on fuel, raw materials and financial transactions, you are effectively reducing their ability to survive and grow,” Walugembe said.

He added that rising compliance costs could erode the tax base. “If the cost of doing business formally becomes too high, many will opt out. That undermines revenue collection in the long term,” he said.

Mobile money operators also highlighted the effect of digital transaction taxes on usage, noting that higher costs are already prompting some consumers to revert to cash.

“As mobile money agents, it is discouraging when we see taxes being increased because it directly affects usage. Customers are already complaining about the cost of transactions,” one operator said.

The Civil Society Budget Advocacy Group said existing levies — including a 0.5 per cent tax on withdrawals and a 15 per cent charge on service fees — are already constraining adoption of digital financial services.

“High transaction costs discourage usage and can push users toward cash-based alternatives, which reduces traceability and weakens the tax system,” Mukunda said.

Alternative tax proposals

Despite the criticism, stakeholders outlined alternative approaches to revenue mobilisation. These include lowering and harmonising excise duties on financial transactions to 0.25 per cent across platforms, and reducing taxes on entry-level smartphones to expand access to digital services.

“This is not about reducing revenue, but about expanding the base. Lower rates applied to a wider base can generate more sustainable revenue over time,” Mukunda said.

Walugembe said a broader strategy was needed to support enterprise growth. “Government must focus on widening the tax base instead of increasing rates on the same taxpayers. Supporting SMEs to grow will ultimately generate more revenue than taxing them heavily at an early stage,” he said.

Stakeholders also questioned continued tax exemptions for large investors, pointing to the proposed extension of incentives for the Bujagali Hydropower Project, estimated to cost about Shs115bn annually in foregone revenue.

“It is difficult to justify increasing taxes on basic goods while extending tax holidays to large investors. This raises serious questions about fairness and equity,” Mukunda said.

Uganda’s tax-to-GDP ratio remains at about 13–14 per cent, below the level often cited for developing economies, underscoring structural challenges in revenue mobilisation. With a large share of economic activity in the informal sector, analysts say raising rates alone may not deliver sustained gains.

“Uganda cannot tax its way to prosperity by increasing rates on a narrow base,” Mukunda said. “The solution lies in growing the base, improving compliance and supporting economic activity.”

As parliament prepares to debate the proposals, attention is likely to focus on how to balance revenue needs with the impact on households and businesses.