Taxation and the Informal Business Sector in Uganda: An Exploratory Socio-Legal Study

Abstract

Sustainable taxation could build the capacity of governments in the Global South, contributing to the realization of the 2030 Sustainable Development Goals. A major challenge for countries in Sub-Saharan Africa today is the growing informal sector. Taxing the informal sector could support domestic revenue mobilization and build a wide tax base. However, because of the nature, size, and location of informal businesses, this sector is known to be hard-to-tax. This study intends to gather a bottom-up understanding of taxation in the informal sector, and tax morale among small and medium-sized enterprises (SMEs) in Kampala, Uganda. It shows how socio-legal research can contribute to the study of tax and development. We use data from a two-month qualitative fieldwork study to examine the social fabric within which these businesses operate. The results show that there is very low tax morale among SMEs in Kampala. Tax compliance attitudes are influenced by issues relating to their trust, knowledge of the tax regime, perspectives on public goods and service delivery, and ideas about fairness, as well as the power of the authorities to enforce compliance. The presumptive tax system in place is not capable of being aligned with the structure of the informal sector. We argue that it is important that the development of the informal economy and taxation go hand in hand, thereby building the capacity of society to pay taxes, rather than the capacity of the state to enforce taxation.

Keywords: Taxation, Socio-Legal Research, Informal Sector, SMEs, Uganda.