Uganda's tax exemption hits sh3 trillion

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Over the past five financial years, the value of revenue forgone by the government as a result of tax exemption has increased from sh2.4 trillion in financial year 2019/20 to sh3.6 trillion in financial year 2023/24.

According to the Ministry of Finance's latest report on tax exemptions dated March 2025, the increase represents a 46% growth. As a percentage of Gross Domestic Product (GDP), revenue forgone rose from 1.76% in financial year 2019/20 to 2.0% in financial year 2022/23 before declining to 1.78% in financial year 2023/24.

According to the report, under the Personal Income Tax exemption, revenue loss rose from sh470.7b to sh799.9b, during the same period, representing a 70% rise. 

In Uganda, employment income is taxed under the Pay-As-You-Earn (PAYE) system. However, they are categories of employees whose salaries are not subject to tax. Some of them include persons employed in the Uganda Peoples’ Defence Forces, the Uganda Police Force, External Security Organisation, Internal Security Organisation or the Uganda Prisons Service.

Other persons include Judicial staff, MPs’ allowances, an award received by a sports person as a reward for winning or participating in a sports competition sports among others.

According to the report, the exemption is aimed at enhancing the low pay of security personnel and for MPs’, it is to relieve the burden of tax on the emoluments of Members of Parliament and to recognise expenses incident to the discharge of their duties.

Under Corporate Tax, revenue foregone increased from sh253.9b in Financial Year 2019/20 to sh326b in Financial Year 2023/24, reflecting a 28% growth.

However, as a percentage of GDP, the report states that revenue foregone declined from 0.18% to 0.16% over the same period, representing an 11% decrease.

“It is important to note that the estimates do not fully capture the revenue foregone for certain key provisions, such as Double Taxation Agreements (DTAs) and some exemptions for investors in strategic sectors,” the report states.

Some of the exemption under Corporate Tax include, 10-year tax holiday from on income derived by a person from letting or leasing facilities in an industrial park or free zone, 10-year tax holiday from business income tax for qualifying sectors, 10-year tax holiday from business income derived from exportation of finished consumer or capital goods, exemption for the income of Bujagali Hydro Power Project for 5 years up to 2022 (extended to 2027), exemption for the income of a Savings and Credit Cooperative Society up to June 30, 2027 among others.

Under Value Added Tax, the report indicates that the government incurred revenue loss of sh677b, representing a 14% rise over the five-year period.

However, as a share of GDP, this amount declined from 0.42% to 0.34% during the same period.

“Until the most recent financial year, the largest source of foregone revenue was deemed VAT (classified under allowances). However, in financial year 2023/24, exemptions accounted for the highest revenue forgone, amounting to sh325b. Tax Expenditures under VAT dropped from 0.61% of GDP in 2022/23 to 0.34% in FY 2023/24, mainly due to a significant reduction in revenue forgone through VAT deeming. This decline resulted from tighter controls implemented by the URA,” the report states.

Some of the exemptions under VAT include: Supply by way of: sale, leasing or letting of immovable property, the supply of: services, inputs, machinery, tools and implements suitable for use only in agriculture, the supply of: animal feeds and mixed components such as egg shells, feed additives, wheat bran, maize bran, premixes, consecrates and seed cake, the supply of: deep cycle batteries, composite lanterns and raw materials for the manufacture of deep cycle batteries and composite lanterns the supply of: photosensitive semiconductor devices, including photovoltaic devices, whether or not assembled in modules or made into panels; light emitting diodes, solar water heaters, solar refrigerators, and solar cookers, the supply of: lifejackets, lifesaving gear, headgear and speed governors, the supply of: any goods and services to the contractors and subcontractors of hydro- electric power, solar power, geothermal power or bio gas and wind energy projects.

Under Customs duties, the report indicates that revenue forgone from customs duties increased from sh549b in Financial Year 2019/20 to sh11 trillion in FY 2023/24, reflecting a 107% rise. As a percentage of GDP, foregone revenue rose from 0.39% to 0.56% over the same period compared to the previous financial year (FY 2022/23).

“In Financial Year 2023/24, 93% of the foregone revenue from customs duties resulted from rate reliefs provided through the Stay of Application of the Common External Tariffs and Duty Remission schemes,” the report states.

Uganda has, over the years, extended the use of the conventional duty remission scheme to goods imported for the implementation of projects under a special operating framework with the Government to reduce the cost of establishment and operation, especially in the manufacturing and tourism sectors, hence making Uganda an investment destination.

The East African Community (EAC) operates under a unified customs framework governed by the East African Community Customs Management Act (EACCMA).

The EAC member countries (Burundi, Democratic Republic of Congo, Kenya, Rwanda, South Sudan, Tanzania, and Uganda) apply a harmonised trade policy (tariff regime) through the Common External Tariff (CET) and product import quotas from third-party countries for goods entering the region.

Collectively, the EAC functions as a Single Customs Territory, where trade between Member States is free of duties and restrictive trade regulations.

Customs duties are imposed on the Customs, Insurance, and Freight (CIF) value of imported goods.