This study exploits the staggered implementation of Uganda’s 1997–2012 commitments under the East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA) trade liberalisation programs to identify the causal impact of external tariff reductions on domestic revenue performance. Merging administrative customs and tax data with a newly digitised schedule of applied preferential tariffs, we construct a product-level panel that tracks statutory rates, effective duty collections, VAT and excise yields, and firm-level compliance from 1995 to 2018.

Main findings:

Using a difference-in-differences strategy that instruments for liberalisation intensity with pre-agreement MFN tariffs, we find that a 10-percentage-point decline in import duties reduces customs revenue by 6.3% in the short run but is offset within four years by a 7.8% rise in VAT and excise collections, yielding a small positive net fiscal effect.

Mechanisms of revenue recovery:

Revenue recovery is driven by import substitution elasticities of 2.1, a doubling of registered importers, and improved tax compliance among previously informal firms.

Sector-specific analysis:

Sector-specific analysis reveals stronger resilience in manufacturing inputs and consumer non-durables, whereas luxury goods display persistent shortfalls.

Counterfactual simulations:

Counterfactual simulations indicate that 88% of the foregone tariff revenue would have been lost anyway through smuggling and mis-invoicing under the status quo.

Conclusion:

Our findings suggest that low-income countries can safeguard fiscal space during external liberalisation by coupling tariff reforms with administrative modernisation and complementary domestic consumption taxes.