Kampala: Uganda’s economy heavily relies on micro, small, and medium enterprises (MSMEs), which constitute 90 percent of private-sector production and employ over 2.5 million people. These enterprises play a vital role in knowledge transfer, industrialization, export promotion, and domestic resource mobilization. Despite their significance, a vast majority of these enterprises operate in the informal sector, a fact highlighted by a 2021 study conducted by the Economic Policy Research Centre (EPRC) titled “Assessment of Informal Businesses in Uganda.”
The EPRC study reveals that Uganda’s informal sector is characterized by two main types of informality: legal and fiscal. Legal informality is defined by the absence of a trading license due to non-registration with the Uganda Registration Services Bureau (URSB) and local governments. Fiscal informality refers to businesses not registered with the Uganda Revenue Authority (URA), resulting in them not paying taxes. The study’s findings are telling: 30.1 percent of informal businesses are not registered with Local Authorities, 91.7 percent are not registered with URSB, 99.2 percent are not registered with URA, and 26.3 percent do not have a trading license.
The reasons for non-registration among businesses are varied. Many cite the perceived high cost of business registration, lack of incentives to register, poor service delivery within local governments, and the absence of a supportive policy and legal framework for reducing informality. These reasons point to a systemic issue that requires a multifaceted approach to address. “Given the above reasons, there is a need to increase business awareness about the benefits of registration through mass media campaigns,” the policy brief suggests. It also calls for deeper coordination and institutional funding to enable URSB, URA, and local governments to widen the scope of business registration.
The informal sector in Uganda contributes about 49 percent to the country’s GDP, yet less than one percent of taxes are collected from this sector. This discrepancy indicates a significant loss in potential tax revenue for the government. With an estimated 80 percent of the economy operating informally, the tax burden disproportionately falls on the remaining 20 percent of formal enterprises. This scenario underscores the importance of formalizing the informal sector, both for increasing tax revenue and for creating a more equitable tax system.
The World Bank (2020) describes the informal sector as encompassing businesses, workers, and activities operating outside the legal and regulatory systems or frameworks. This sector includes not just unregistered street vendors and tiny businesses, but also established businesses employing hundreds of people across diverse industries, all of which go untaxed. The informal sector’s breadth and depth in Uganda highlight the urgent need for reforms to bring these enterprises into the formal economy.
Formalizing the informal sector presents a significant opportunity for Uganda. It would broaden the tax base, reduce the tax burden on formal businesses, and increase government revenues. These additional funds could then be reinvested in public services and infrastructure, further stimulating economic growth. Moreover, formalization would provide businesses with better access to financial services, legal protections, and market opportunities, fostering a more robust and resilient economy.
To achieve this, the government needs to implement a supportive policy and legal framework that incentivizes businesses to register. This could include simplifying the registration process, reducing registration fees, and providing tax breaks or other benefits to newly registered businesses. Additionally, increasing awareness about the benefits of formalization through mass media campaigns could help shift public perception and encourage more businesses to register.
In conclusion, while Uganda’s informal sector currently plays a crucial role in the economy, its formalization offers significant benefits. As the EPRC study indicates, addressing the challenges of informality requires a concerted effort from both the government and the private sector. By fostering a supportive environment for business registration and operation, Uganda can unlock the full potential of its MSMEs, driving sustainable economic growth and development.
