Income tax compliance among small businesses in Uganda: a legal perspective

Abstract

This study investigates why income tax compliance of small businesses in Uganda remains low despite the various policy and legislative efforts to curb this. It employs the enmeshment, ability to pay, political settlement, and revenue bargaining theories to explain income tax compliance of small businesses. It focuses on establishing how the presumptive tax laws align with the tax canons and influence small businesses' tax compliance alongside factors like legislative consultations, revenue bargains, and government accountability. Using a mixed-method research design, the study finds that the legal framework for presumptive tax lacks clarity and equity for small business owners, leading to low compliance. This is caused by the absence of express policy guidelines for determining annual gross turnover and unclear standards for acceptable business records and their declaration mode. Additionally, the lack of penalties for officers issuing business licenses and registering stamp duty instruments to applicants without tax identification numbers contributes to non-compliance. Furthermore, small business owners often evade taxes by under-declaring sales and concealing stock, which presents a challenge to revenue assessors in balancing equity and efficiency in the tax system. Additional factors like limited legislative consultations, revenue bargains, and poor delivery of public goods and services also contribute to low compliance. The study recommends reforming tax laws to provide clear guidelines for gross turnover computation, define acceptable business records and format, impose penalties for non-compliant licensing and stamp duty registration officers, and require tax clearance certificates as a pre-requisite for trading license renewal. Enhancing tax compliance could involve engaging business analytics, tax experts, and business association groups to understand small businesses better and develop more effective tax strategies. The government should also focus on improving public service delivery to enhance voluntary tax compliance. Further, the Uganda Revenue Authority is advised to develop a simplified mobile application for filing small business returns, incentivizing compliance, and enhancing business assessment and monitoring capacity.