The impact of informal sector taxation on domestic revenue mobilization in Uganda: a case study of Kikuubo business area in Kampala

Abstract

Uganda’s informal sector constitutes more than three-quarters of national economic activity, yet contributes minimally to domestic revenue. This study examines how informal sector taxation influences domestic revenue mobilization in Uganda, using Kikuubo Business Area in Kampala as a micro-level case study. A mixed-methods design was employed, combining primary data from 200 informal traders with secondary macroeconomic data from URA, UBOS, IMF, and World Bank covering 2000–2024. Logistic and Probit models were used to estimate determinants of tax compliance at the trader level, while Heteroskedasticity and Autocorrelation Consistent (HAC-OLS) and Two-Stage Least Squares (2SLS) models assessed the impact of informality, enforcement, digitalization, and formalization on Uganda’s tax-to-GDP ratio. Results show that trader compliance averages 54% and is significantly influenced by awareness, perceived fairness, tax morale, EFRIS usage, formal registration, and turnover. Digital adoption increases the likelihood of compliance more than twofold, while fairness and awareness play critical behavioral roles. At the macro level, enforcement intensity, formality rates, and digitalization positively and significantly improve tax performance, whereas the informal sector’s size exerts a strong negative effect. The 2SLS results confirm that enforcement has a causal impact on revenue mobilization when supported by institutional capacity. Scenario simulations demonstrate that increasing awareness, fairness perception, digital adoption, and formalization could raise compliance to 73%, generating approximately UGX 0.1 trillion in additional annual revenue and increasing the tax-to-GDP ratio by 0.01 percentage points. The study concludes that sustainable revenue mobilization requires a balanced approach, strengthening enforcement, enhancing institutional capacity, improving digital inclusion, and building taxpayer trust. It recommends reforms in presumptive taxation, continuous taxpayer education, transparent service delivery, digital training, and harmonized enforcement across local and national authorities. These measures would significantly improve compliance, broaden the tax base, and enhance Uganda’s fiscal sustainability.