Tax incentives, investment climate, and investment growth in Uganda; a case of manufacturing firms in Kampala metropolitan area

Abstract

This study investigated the effect of tax incentives on investment growth in Uganda, focusing on the moderating role of the investment climate with reference to manufacturing firms in the Kampala Metropolitan Area. The study aimed to address the following objectives: to examine the effect of tax holidays on investment growth in Uganda, to evaluate the effect of investment tax credits on investment growth in Uganda, to establish the effect of investment allowances on investment growth in Uganda, and to investigate the moderating effect of the investment climate on the relationship between tax incentives and investment growth in Uganda. To achieve these objectives, the study employed a cross-sectional and exploratory research design with a quantitative approach, collecting numerical data from 213 managers in various manufacturing firms in the Kampala Metropolitan Area. Data were analyzed using the Statistical Package for the Social Sciences (SPSS Version 27) and Andrew F. Hayes’ Macro Process Version 4.2. The study revealed that tax holidays (B = 0.066, p = 0.333), investment tax credits (B = 0.205, p = 0.00), and investment allowances (B = 0.263, p = 0.00) positively influence investment growth among manufacturing firms in Uganda. Furthermore, the results indicated that the investment climate had an insignificant moderating role in the relationship between tax incentives and investment growth, as demonstrated by an insignificant interaction term between tax incentives and the investment climate (B = 0.056, p = 0.015, 95% CI [-0.095, 0.206]). The results imply that manufacturing firms in Uganda require support in the form of tax incentives to boost their performance. The study emphasizes the need for more targeted and specific actions in improving the tax environment for manufacturing firms in Uganda. It recommends that the government focus on providing tax education programs tailored to help businesses understand and leverage available tax incentives effectively. Additionally, the government should establish a periodic review process for tax incentives to ensure they align with the changing needs of the manufacturing sector, as well as implement clearer policies that are directly applicable to different sectors, particularly manufacturing. The study suggests the introduction of non-tax incentives, such as grants or subsidies, to further support the sector. For local investors, the study advocates adopting formal business practices, including keeping audited financial records, which would enhance their eligibility for tax incentives. This study is particularly relevant to key stakeholders such as the government, Uganda Revenue Authority (URA), and manufacturing firms, as it underscores the importance of creating a favorable investment climate. It also highlights the role of specific tax incentives, like tax holidays and investment tax credits, in attracting both local and foreign investment. However, the study acknowledges its limitations, such as focusing only on the manufacturing sector and using a cross-sectional quantitative approach. Future research should investigate the broader legal framework surrounding tax incentives and explore the specific challenges businesses face in utilizing these incentives.