Why taxing loss‑making companies is a policy disaster - Daily Monitor

Uganda's informal economy is suffocating under a regulatory squeeze that threatens both macroeconomic stability and investor confidence across East Africa. Two interconnected crises—taxation of unprofitable enterprises and the collapse of street vending—reveal a fundamental policy misalignment that penalizes job creation, entrepreneurship, and the poorest segments of society.

## Why is Uganda taxing companies that lose money?

Uganda Revenue Authority (URA) enforcement has widened to include loss-making firms, creating a perverse incentive structure. Companies operating at a loss—common during expansion phases, recessions, or industry downturns—now face tax obligations on phantom profits. This violates basic tax principle: only profitable enterprises should bear income tax. The policy forces struggling businesses to choose between insolvency or tax non-compliance, collapsing the formal-sector entry ramp that typically pulls workers out of poverty.

For investors, this signals regulatory unpredictability. A firm investing in manufacturing or services expects tax relief during startup losses; instead, Uganda's interpretation demands payment on non-existent earnings. Multinational enterprises eyeing Uganda's market will recalculate risk premiums, potentially redirecting capital to Kenya, Rwanda, or Tanzania—jurisdictions with clearer, profit-based tax frameworks.

## How has the street vendor economy collapsed?

Uganda's informal sector employed over 80% of the workforce as recently as 2020. Street vending—the most visible rung of the informal economy—generated livelihoods for millions in Kampala, Jinja, and secondary cities. Recent enforcement sweeps, combined with post-pandemic consumer retrenchment and the loss-making tax regime's downstream effects on wholesale costs, have devastated this ecosystem. When manufacturers and wholesalers face impossible tax burdens, input costs rise; street vendors, operating on 5-15% margins, cannot absorb these shocks.

Anecdotal reports describe Kampala's commercial streets as "dead"—a telling metaphor for economic contraction trickling from formal policy into informal reality. This isn't merely a poverty issue; it's a demand-side collapse. Street vendors represent the bottom of consumer spending; their exit from economic activity signals broader purchasing power erosion across urban centers.

## What are the macroeconomic implications?

Uganda's GDP growth has decelerated from 7%+ (pre-2020) to 4-5% ranges. Loss-making tax enforcement and vendor-sector collapse compound this slowdown. Formal employment cannot absorb displaced informal workers fast enough—Uganda's unemployment rate remains above 9%, with youth unemployment exceeding 20%. Tax revenue, paradoxically, likely *declines* as non-compliant firms exit the economy or go underground, shrinking the taxable base the URA intended to expand.

For regional investors, this matters. Uganda anchors East African supply chains; its economic contraction dampens demand for Kenyan industrial goods, Tanzanian agricultural inputs, and Ethiopian logistics services. The East African Community's integration goals depend on member-state economic resilience; Uganda's policy misstep ripples across borders.

The path forward requires urgent reform: exempting loss-making enterprises from income tax (standard OECD practice), reducing street-vendor licensing fees to near-zero, and offering tax holidays for early-stage SMEs. Without course correction, Uganda risks cementing its reputation as a regulatory wildcard—a label that costs capital.

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