Tax Exemptions: Manufacturing Wins Big, Construction & Transport Lag

A recent study by Uganda’s Ministry of Finance indicates that tax incentives, while costly to the government in forgone revenue, are proving to be a valuable tool for economic growth, though their impact is unevenly distributed across different industries.

The analysis, covering firms that received tax holidays between June 2022 and June 2025, found a strong overall benefit-cost ratio of 2.49 for strategic sectors, suggesting that for every shilling in lost tax revenue, nearly 2.5 shillings were generated for the economy.

Manufacturing emerged as the star performer, achieving a remarkable benefit-cost ratio of 5.49. This success is attributed to the sector’s capacity for value addition, its role in industrialization, significant job creation (employing 5,880 workers), and its stimulus to local supply chains. Export-oriented agriculture also demonstrated positive results with a benefit-cost ratio of 4.78, contributing over 4,400 jobs.

In stark contrast, the construction sector registered a dismal benefit-cost ratio of just 0.02, creating only 23 jobs. The transport and storage sector fared even worse, recording a zero benefit-cost ratio and a mere eight jobs. Several service sectors, including wholesale, retail, health, and social work, also showed negligible returns.

While the study acknowledges the substantial economic activity and investments spurred by beneficiaries of these incentives, it cautions that not all benefits can be solely attributed to the tax holidays. The report also highlighted weaknesses in local value creation and inconsistent adherence to local sourcing targets by some firms.

The Ministry of Finance proposes a shift from broad tax holidays to performance-based incentives. These would be directly tied to measurable outcomes such as export growth, job creation, and increased local sourcing, aiming for a more targeted and effective approach to economic development.

Source: Daily Monitor (Uganda)