Tax evasion is a shortcut to business collapse

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OPINION

By Joshua Kato, CA

Uganda’s fiscal position has grown increasingly precarious.

In the 2018/19 year, the national deficit reached 8% of GDP up from 6% a year earlier while public debt rose from 30% to 32% of GDP. Fast forward to 2024, and the situation has seen only marginal improvement: the fiscal deficit narrowed to 4.5% of GDP in FY2023/24 but widened again to a projected 5.7% for FY2024/25.

Even more alarming is the outlook for FY2025/26, where the national budget anticipates a deficit of 7.6% of GDP, financed largely through domestic and external borrowing. Underpinning this recurring shortfall are persistent revenue gaps, many attributed to widespread tax evasion, which collectively drains billions of shillings each year.

Tax evasion is the deliberate and illegal avoidance of taxes through deceptive means. It manifests in various forms: underreporting revenues, overstating costs, smuggling to avoid customs duties, bribing officials, hiding assets abroad, and submitting fabricated documents for deductions. Unlike legal tax avoidance strategies such as claiming legitimate deductions or investing within regulatory frameworks, evasion is punishable under Ugandan law, notably the Tax Procedures Code Act, 2014, and the Income Tax Act (Cap. 340).

The consequences of this malpractice are far-reaching. When taxpayers conceal earnings through undeclared cash transactions, smuggled imports, or fictitious invoices, the URA’s tax base is eroded. Honest businesses are forced to compensate for these shortfalls, often through increased rates or stricter enforcement. This retaliatory adjustment further alienates compliant taxpayers and fosters a proliferation of informal, under-the-table operations. The resulting distortion undermines healthy competition and deepens economic inequality, as those with access to illicit tax schemes gain an undue advantage.

Removal of revenue through evasion also cripples public investment in critical infrastructure. With the FY2025/26 budget projecting reliance on borrowed funds to fill a 7.6% deficit gap, interest servicing now consumes a growing share of government receipts one-quarter to one-third of domestic revenues. This diversion of funds limits investment in healthcare, education, and roads, reinforcing poverty cycles and constraining Uganda’s growth.

Internationally, persistent tax underperformance tarnishes Uganda’s creditworthiness and development partnerships. As public debt surpasses 52% of GDP, and fiscal deficits hover near 6–8%, global investors and donors begin to question the country’s fiscal discipline. Weak tax compliance signals inefficiencies in governance and enforcement, dampening confidence in Uganda’s broader economic agenda.

Ultimately, tax evasion is not just an individual wrongdoing: it is a systemic threat that undermines Uganda’s social contract. Reducing debt, funding public services, and building a prosperous society depend on restoring tax integrity. Strong enforcement, disclosure of offshore assets, digital invoicing systems like EFRIS, and stricter audit regimes are necessary. However, these must be complemented by consistent public outreach, equal application of the law, and tangible rewards for voluntary compliance.

Tax evasion is a serious offence in Uganda, punishable under the Tax Procedures Code Act, 2014, and relevant provisions of the Income Tax Act (Cap 340). The law distinguishes between civil (penal) liabilities and criminal offences, both carrying significant consequences for individuals and businesses that deliberately fail to comply with their tax obligations.

Under Section 66 of the Tax Procedures Code Act, any person who knowingly or recklessly makes a false or misleading statement to the Uganda Revenue Authority (URA) is liable to pay a penal tax equal to twice the tax shortfall arising from the falsehood. This includes overstating expenses, understating income, or falsifying tax returns. Where the offence is due to inadequate documentation, Section 19(2) allows the Commissioner to impose a penal tax equal to twice the amount of tax payable for the affected period.

Failure to file a return as required under Section 18(1) also attracts a penalty. If the taxpayer fails to submit a return by the due date, a penal tax of 2% of the tax payable per month (or 10 currency points, whichever is higher) is applied until the return is filed.

Beyond these administrative penalties, Section 80 of the Act provides for criminal sanctions. A person convicted of intentionally evading tax may face a fine of up to 250 currency points (approximately sh5 million), imprisonment for up to 10 years, or both, depending on the nature and gravity of the offence. This includes using false taxpayer identification numbers (TINs), fabricating invoices, obstructing URA officials, or destroying tax records.

Where a tax agent or accountant aids or facilitates tax evasion, Section 80(2) stipulates that they may be fined double the amount of tax evaded or imprisoned for a term not exceeding five years. This emphasizes the legal duty of professionals to promote compliance, not manipulation.

The law is particularly strict on non-compliance with digital enforcement tools like Electronic Fiscal Receipting and Invoicing System (EFRIS) and Digital Tax Stamps, with Section 80A (as amended) prescribing fines of up to 1,500 currency points (sh30 million) and jail terms of up to 10 years for tampering with such systems.

Rather than flirting with the steep financial and reputational costs of tax evasion, Ugandan businesses can embrace strategic tax planning and lawful tax-avoidance techniques to achieve sustainable savings and strengthen their social license to operate. Proper tax planning means organizing transactions in advance within the four corners of the Income Tax Act (Cap 340), the Tax Procedures Code Act, 2014 and sector-specific statutes to minimize liabilities without misrepresenting facts.

Practical steps include: maintaining accurate books and e-invoicing records so that every allowable cost (Section 22) and capital allowance (Section 27) is captured; timing capital purchases to benefit from initial depreciation reliefs; taking advantage of approved investment incentives under the Uganda Investment Code Act, 2019 or agro-processing exemptions (Schedule 2 of the Income Tax Act); and using legitimate group-structuring tools such as thin-capitalization limits and advance transfer-pricing rulings to prevent disputes.

Complement these measures with robust internal controls, periodic tax health checks, and open dialogue with URA (for example, requesting advance practice notes or private rulings) to gain certainty before executing complex transactions.

In the end, the question is not whether tax compliance is burdensome but whether we, as Ugandan business leaders, are bold enough to see the bigger picture. Tax isn’t just a statutory obligation; it’s an investment in our shared future. Every honest declaration is a brick laid in the foundation of a stronger economy, a healthier nation, and a more equitable society.

We cannot build lasting empires on a broken system, one where a few carry the weight while others slip through the cracks. But we can build greatness on truth, strategy, and integrity. A future-ready enterprise is one that contributes, transparently, to the future it hopes to thrive in. That is the Uganda we deserve, and the one we must dare to build.

The writer is a Chartered Accountant & International Chartered Tax Advisor.