A larger part of the world’s working population earns its livelihood from the informal economy.[1] Informality is herein defined as non-registration of business for taxation and incorporation purpose.
The International Labour Organisation (ILO) estimates that informal employment comprises about 72 percent of non-agricultural employment in Sub-Saharan Africa and that the share would be much larger if informal employment in agriculture were included. In 2017/18, Ministry of Finance, Planning and Economic Development (MoFPED) attributed 51 percent of Uganda’s economy to activities in the informal economy.
Several studies have attributed informality in Uganda to lack of alternative sources of livelihood, resulting from the inability of the formal sector to absorb bulging job seekers. The skill requirements for jobs in the formal sector also exacerbate the informality challenge. In addition, the expensive and lengthy registration process and lack of awareness about the need and the value of business registration have been highlighted in the third National Development Plan (NDP III) among the main obstacles to business registration.
Preliminary results from a recent survey conducted by the Economic Policy Research Centre (EPRC) on informal businesses in Uganda suggest that business communities, especially those in rural areas, lack awareness about the benefits of business registration for tax and incorporation purposes. The survey also suggests that registration bodies such as Uganda Registration Services Bureau (URSB) and Uganda Revenue Authority (URA) are not known in the rural parts of the country.
Some rural areas also have no URSB and URA offices in the vicinity. Indeed, according to URSB, the number of new companies and business names registered has been declining annually as illustrated in figure 1 below.
The lack of formalisation portends significant cost to the economy. A large informal sector pauses a structural constraint on revenue growth as informal businesses operate beyond the sight of the tax system. NDP III highlights informality among the factors that deny the economy up to 40 percent of the annual revenue targets. This impacts on fairness among businesses and significantly raises the tax burden faced by their tax-compliant counterparts as the tax authority strives to meet the country’s domestic revenue targets.
This, therefore, provides a basis for the quest to reduce the size of the informal sector. Indeed, the reduction of the size of the informal sector is one of the key results to be achieved in the next five years under the private sector development programme of NDP III.
Several interventions have been implemented in the bid to ease the process of formalisation. Such interventions include the multi-institutional Tax Registration Expansion Project (TREP), establishment of the National Identification Register and investment in the National Backbone Infrastructure project as well as setting up improved market facilities to accommodate the hawkers and street vendors in different parts of the country.
Despite these efforts, informality in Uganda has persisted and this may deter the achievement of government objectives of reducing the size of the informal sector to 45 percent in 2024/25.
Way forward
Therefore, in order to achieve the planned reduction of the informal sector during the NDP III period, there is need to sensitize the business communities in rural areas about the reasons why their businesses should be registered. In this case, establishment of one-stop registration points in every district is pertinent.
These should be tasked with organising frequent sensitisation exercises in business communities across the country which would go a long way in increasing awareness about who, how and where to register their businesses. This would require concerted efforts by the concerned government agencies with assistance from local government officers who are closer to the respective business communities.
The government should support hands-on skilling/on-job training in form of internships in formal institutions to enable job seekers to obtain the necessary skills required for them to join the formal sector.
Furthermore, putting in place incentives to business registration/formalisation, e.g., the extension of social security coverage to all employees in registered businesses, provision of financial support to registered businesses especially at start-up and during a crisis such as COVID-19 would be key in motivating business owners to have their businesses registered.
Footnotes
[1] The key underlying criteria commonly used to define informality relates to business size, nature of registration with regulators, payment of taxes, contract arrangements and social security coverage for employees.