The effect of tax literacy on business performance among small and medium enterprises in Kampala, Uganda

Abstract

The Small and Medium Enterprises (SME) sector plays a crucial role in the economic growth of Uganda with its Gross Domestic Product contribution standing at over 70%, and its employment and job creation rising to 90%. The SMEs however have a high mortality rate and grapple with wide ranging challenges. Despite the significant contribution of MSMEs to Uganda’s economy, entrepreneurs face numerous challenges that hinder their growth and success. The study sought to establish the effect of tax literacy on the performance of small and medium scale enterprises in Kampala, and also compared tax literacy and business performance among female and male owned businesses. The study examined the sales level of firms based on the tax literacy levels of the owners/operators using secondary survey data from 400 enterprises covered in the Kampala firm survey 2024 conducted by researchers at Makerere University in Collaboration with Kampala Capital City Authority. Descriptive summary statistics, and multiple linear regressions were used in the analysis. Chi-square and t-statistic tests were used to determine the relationship between tax literacy and firm performance, and the gender effects. The results revealed that tax literacy is an important factor for business performance. . Overall, moving from a lower tax knowledge level to a higher one improves sales by nearly 1-unit (0.967). The effect seems slightly stronger and more statistically robust for males at 0.999-units than for females at 0.397-units. The level of tax literacy is higher among male business owners. The results show that majority of business owners had tertiary education, and having completed university was associated with better business performance for males, increasing sales by 0.162- units male but not for female-owned enterprises. The results also show that an additional year of operation increased monthly sales by 0.0499-units overall, but the effect was stronger for male- owned firms (0.108-units) compared to female-owned firms (0.0717-units). Furthermore, poor quality of road infrastructure is associated with significantly lower monthly sales – about 0.615- units reduction in monthly sales. The negative impact is much larger for males (0.490-units reduction in sales) than for females (0.073 units). This study highlights the need to for improved tax literacy programs, including those targeting female entrepreneurs. The Uganda Revenue Authority, Ministry of Finance, Planning and Economic development and other agencies at division level charged with tax matters should conduct tax literacy programs tailored to SMEs. Government should foster interventions to support the survival and growth of SMEs since they absorb a large proportion of University graduates in the country. Improved road infrastructure is also important for the growth of businesses within Kampala city and inevitably other business centers across Uganda.