Title: Effect of Tax Policy on the Growth of Small and Medium Enterprises in Uganda: A Case Study of Kampala Capital City Authority (KCCA)
Authors: Ahumuza Andrey, Kobusingye Prudence
Volume: 9
Issue: 2
Pages: 50-55
Publication Date: 2025/02/28
Abstract:
This study investigated the impact of tax rates, tax compliance requirements, tax incentives, and tax reforms on the growth, profitability, and sustainability of Small and Medium Enterprises (SMEs) in Kampala Capital City Authority (KCCA). The primary objectives were to assess the effects of tax rates and compliance requirements on profitability, evaluate the key challenges faced by SMEs in navigating the existing tax policies, and examine the effectiveness of tax incentives and reforms in promoting SME growth and formalization. Using a multiple linear regression model, the study analyzed data collected from 200 SMEs operating in Kampala. The findings revealed that both tax rates and tax compliance requirements had a significant negative impact on SME profitability, with higher tax rates and complex compliance processes decreasing profitability. The regression results indicated that tax rates (? = -0.47, p < 0.05) and compliance requirements (? = -0.39, p < 0.05) were significant predictors of profitability, suggesting that complex tax systems and increased compliance costs hindered SME growth. The study also found that the cost of compliance and tax policy complexity were significant barriers to business sustainability, with these factors negatively affecting SMEs' ability to scale and remain operational in the long term. However, tax incentives and tax reforms were found to have a positive impact on SME growth and formalization, with incentives (? = 0.52, p < 0.01) and reforms (? = 0.45, p < 0.05) significantly contributing to business expansion and the transition of informal businesses into the formal sector. The results further suggested that SMEs benefiting from tax incentives were more likely to experience higher growth rates and improved financial stability. The study concluded that to enhance the growth, profitability, and sustainability of SMEs in Kampala, there should have been a simplification of tax policies, reduction in compliance costs, expansion of tax incentives, and the continuation of pro-SME tax reforms. Ongoing monitoring and adjustments to these policies were essential to ensure their effectiveness in fostering a supportive environment for SMEs.