This study examines the impact of Uganda’s tax regime on small and medium enterprise
(SME) growth across five key sectors—agriculture, manufacturing, tourism,
telecommunications, and financial services. Using a novel combination of marginal
effective tax rate (METR) analysis, firm-level survey data from 892 SMEs, and
administrative tax records from the Uganda Revenue Authority (URA), we assess how tax
instruments, rates, and administrative practices influence investment decisions and
competitiveness. Our findings reveal substantial sectoral heterogeneity: METRs range

from 2.4% in agriculture (due to extensive exemptions) to 19.4% in tourism (from non-
refundable VAT and licensing fees). While presumptive taxation successfully reduced

compliance costs for micro-enterprises, poor threshold calibration, outdated exemption
schedules, and overlapping local-central tax mandates continue to constrain growth. High
compliance costs—averaging $510 annually even for nil-return filers—deter
formalization, with 68% of eligible SMEs remaining outside the tax net. International
comparisons show Uganda’s SME tax burden exceeds regional peers Kenya and Rwanda
by 3-5 percentage points. The paper develops a transaction cost-based analytical
framework integrating behavioral public finance insights to explain the persistent gap
between tax policy intent and SME outcomes. We conclude that revenue-neutral reforms
focused on digital compliance tools, graduated incentives linked to formal status, and
simplified presumptive rates could increase SME contributions to GDP by 1.8% while
raising tax compliance from 32% to 54% over five years.