Assessing the effectiveness of tax incentives on the recovery of small and medium enterprises (SMEs) in Uganda’s post-COVID-19 economic period: a focus on the trading sector

Abstract

This study investigated the effectiveness of tax incentives in supporting the post-COVID-19 financial recovery of Small and Medium Enterprises (SMEs) in Uganda’s trading sector. Specifically, it examined the extent to which SMEs accessed and utilized tax incentives such as Value Added Tax (VAT) reductions, deferred tax payments, and import duty exemptions; evaluated the financial impact of these incentives; identified access barriers; and captured SME-driven recommendations for policy improvement. The study adopted a mixed-methods design, combining quantitative analysis of secondary financial data with qualitative insights from semi-structured interviews. Data were collected from 100 SMEs operating in Kampala’s Central Business District. Descriptive statistics were used to establish patterns in awareness, utilization, and financial performance, while inferential analysis, particularly independent samples t-tests, was applied to compare revenue, profit margins, and cash flow between SMEs that received tax incentives and those that did not. Thematic analysis was used to interpret qualitative data gathered from SME owners and tax officials. The findings showed high levels of awareness of tax incentives but considerably lower utilization, with only 26.5% of respondents benefiting from import duty exemptions despite 61.4% awareness. Statistical analysis revealed that SMEs that accessed at least two incentives reported significantly better financial performance, higher mean revenues (UGX 228.8 million vs. UGX 211.8 million), greater profit margins (11.21% vs. 9.48%), and stronger cash flow (UGX 35.3 million vs. UGX 31.3 million), with all differences significant at p < 0.05. Key barriers included bureaucratic complexity, limited awareness, and perceived favoritism. The study concludes that while tax incentives have the potential to strengthen SME resilience, their impact is undermined by systemic access barriers. Recommendations include digitizing application processes, simplifying procedures, improving outreach, and enhancing transparency in implementation. These reforms are necessary to ensure equitable access and to unlock the full potential of tax incentives in Uganda’s post-pandemic recovery.

Subject Keywords: Tax incentives, SMEs, financial recovery, post-COVID-19, Uganda, VAT, deferred tax, import duty, mixed-methods