Effect of taxation on the performance of selected small and medium-scale enterprises; case study of Nakawa division.

Abstract

This study examined the effect of Taxation on the Performance of Selected Small and Medium Scale Enterprises in Nakawa Division, Kampala District, with the aim of generating evidence to inform tax policy design and compliance strategies. Specifically, the study was guided by four objectives: (1) to assess the level of SME taxpayers’ knowledge of taxation; (2) to evaluate the effect of tax rates on SME performance; (3) to determine the influence of tax incentives on SME growth; and (4) to assess the relationship between tax filing requirements and SME performance. A cross-sectional design was employed, integrating both qualitative and quantitative approaches to enable triangulation of findings. The study sampled 278 SMEs using a combination of simple random and purposive sampling techniques. Data were collected through structured questionnaires and in-depth interviews, and analyzed using SPSS Version 27, applying both descriptive statistics and Pearson correlation analysis. Findings indicated that while SMEs demonstrated moderate awareness of taxation, significant knowledge gaps persisted, particularly regarding tax obligations and incentive access. A statistically significant positive relationship was found between tax incentives and SME performance (r = 0.375, p < 0.001), and tax rates also showed a notable influence. Overall, the study revealed a moderate to strong correlation between key elements of taxation and the performance of SMEs, suggesting that effective tax policies and improved taxpayer education can positively impact SME growth and sustainability. The study recommends that the Uganda Revenue Authority (URA), in collaboration with the Ministry of Finance, scale up tax education campaigns targeting SMEs and implement a tiered tax incentive structure based on enterprise growth stages. These interventions are essential to enhance compliance, reduce business constraints, and promote long-term economic development within Uganda’s SME sector.