By Pauline Arinda
Uganda’s informal sector is the backbone of the country’s economy. From bustling markets and roadside vendors to boda boda riders and small-scale manufacturers, millions of Ugandans earn their livelihoods outside the formal business environment. While this sector drives employment, innovation and household incomes, its limited participation in the tax system represents one of Uganda’s greatest untapped opportunities for domestic revenue mobilisation.
According to the Economic Policy Research Centre’s (EPRC) 2022 Assessment of Informal Businesses in Uganda, commissioned by the Ministry of Finance, Planning and Economic Development, many informal businesses with annual turnovers exceeding UGX150 million possess significant potential for revenue generation. Although these enterprises are economically viable and would qualify for corporate taxation, many remain either fiscally or legally informal, placing them beyond the effective reach of the tax system.
A major factor behind this challenge is Uganda’s predominantly cash-based economy. In many sectors, transactions are conducted using physical cash rather than digital payment platforms, making it difficult for tax authorities to track business activities and income. Cash transactions leave limited audit trails, creating opportunities for underreporting income and tax avoidance. This challenge is common across many developing economies, where digital financial infrastructure is still evolving and a large proportion of businesses operate outside formal regulatory systems.
Despite these challenges, the informal sector remains indispensable to Uganda’s economic growth. It provides employment to millions of people and contributes substantially to national output. However, only a small fraction of economically active Ugandans are registered for tax purposes. Consequently, government loses billions of shillings in potential revenue every year, resources that could finance healthcare, education, road infrastructure and other essential public services.
Uganda’s tax-to-GDP ratio remains below the average for sub-Saharan Africa, underscoring the country’s need to strengthen domestic revenue mobilisation. Expanding the tax base is therefore not simply a revenue objective; it is essential for financing sustainable development while reducing dependence on external borrowing.
The persistence of informality also creates an uneven business environment. Businesses that comply with tax obligations often shoulder a disproportionate share of the country’s tax burden, while competitors operating outside the tax system enjoy lower operating costs. Such distortions discourage voluntary compliance, undermine fair competition and weaken confidence in the tax system.
Yet informality should not be viewed solely as tax evasion. Many small businesses remain outside the formal economy because of limited access to finance, inadequate business knowledge, compliance costs and concerns about regulatory complexity. Addressing these barriers is just as important as strengthening tax enforcement. Formalisation should be presented as a pathway to business growth rather than merely an obligation to pay taxes.
The Uganda Revenue Authority (URA) has implemented several initiatives aimed at expanding the tax register and improving compliance. These include the Taxpayer Register Expansion Programme (TREP), mobile taxpayer registration through the “Tujenge Bus”, door-to-door taxpayer sensitisation and business mapping exercises, as well as simplified presumptive tax arrangements for small businesses. Continued stakeholder engagement and taxpayer education remain critical in building trust between taxpayers and government.
Beyond tax administration, Uganda’s long-term solution lies in accelerating industrialisation and economic transformation. A stronger manufacturing sector creates more formal employment opportunities, integrates small enterprises into structured supply chains, improves compliance with quality standards and promotes business growth. Investments in infrastructure, skills development, digital payments and financial inclusion will further support the transition from informality to formality.
Technology also offers significant opportunities to improve tax compliance. Expanding digital payment systems, electronic invoicing and formal financial services can increase transaction transparency while making it easier for businesses to access credit and participate in the formal economy. As more businesses embrace digital platforms, tax administration becomes more efficient and less burdensome for both taxpayers and government.
Uganda’s informal sector should not be viewed as a problem to be eliminated but as an economic asset to be empowered. The country’s challenge is to create an environment where businesses voluntarily choose to formalise because the benefits outweigh the costs. Simplified tax procedures, fair administration, targeted incentives, access to finance and continuous taxpayer education can transform informality into an engine of inclusive growth.
Closing Uganda’s tax gap will require more than stronger enforcement; it demands partnership, trust and practical reforms that encourage voluntary compliance. By bringing more businesses into the formal economy, Uganda can broaden its tax base, create a level playing field for enterprises, strengthen public service delivery and build a more resilient economy. The informal sector’s hidden potential is immense; unlocking it could become one of Uganda’s most important fiscal success stories.
The writer is a tax advisor
