Impact of value added tax policy reforms on revenue, poverty and inequality in Uganda

Abstract

This study analyses the impact of Value Added Tax (VAT) policy reforms on government revenue, poverty, income inequality, and household consumption in Uganda. VAT is a central component of domestic revenue mobilisation, yet persistent concerns remain regarding its distributional and welfare implications. Using the Uganda tax–benefit microsimulation model (UGAMOD) and data from the Uganda National Household Survey (UNHS) 2016/17 and Uganda Revenue Authority, the study examines the incidence of VAT across consumption deciles and simulates alternative VAT policy scenarios while holding the existing tax base, exemptions, and zero-rated items constant. Specifically, the analysis assesses the distribution of VAT burdens across households, evaluates the welfare effects of the current VAT system, and estimates the revenue, poverty, inequality, and consumption impacts of increasing the standard VAT rate from the baseline of 18 percent to 19 percent and 20 percent. The results indicate that VAT in Uganda exhibits mild but non-linear progressivity. Middle-income households bear the highest VAT burden relative to their consumption, while poorer households are partially protected through exemptions and zero-rated essential goods. The findings show that increases in the VAT rate generate substantial additional government revenue; however, these gains are accompanied by modest increases in consumption-based poverty, particularly among households living near the poverty line, male-headed households, and households with children, due to higher consumer prices. Inequality declines slightly following VAT rate increases, reflecting the larger absolute VAT contributions of higher income households, though the magnitude of this effect is small. vi The study concludes that while VAT remains an efficient instrument for domestic revenue mobilisation in Uganda, VAT reforms involve clear trade-offs between revenue generation, poverty outcomes, and household welfare. It emphasises the importance of using microsimulation tools such as UGAMOD to inform evidence-based tax policy and recommends that any VAT rate increases be accompanied by well-targeted compensatory measures, including social protection interventions, to mitigate adverse welfare effects on poor and vulnerable households.