70% of Kampala informal sector firms can’t be taxed – Report

70% of Kampala informal sector firms can't be taxed - Report
Kampala Minister Beti Kamya (L), KCCA ED Jeniffer Musisi (R) chatting with World Bank officials at the report launch

Close to 70 percent of the informal sector firms in Greater Kampala Metropolitan Area (GKMA) generate 10 million shillings or less in profits, making them fall below the minimum tax threshold for small business income.

This means that efforts to formalise informal firms spearheaded by Kampala Capital City Authority (KCCA) are unlikely to lead to substantial tax revenue gains for the government, according to a report by the World Bank.

The report defines Greater Kampala Metropolitan Area as the five divisions that makeup Kampala City – Nakawa, Kawempe, Makindye, Rugaga and Central Division. It also includes municipalities and town councils in the neighbouring vicinity and sub-national governments of Mukono, Entebbe, Kiira, Nansana and Wakiso municipalities.

Titled “From Regulators to Enablers: Role of City Governments in Economic Development of Greater Kampala,” the report further reveals nearly all (97 percent) of the firms in the informal sector employ five or fewer people and 59 percent are self-employed. And that 93 percent of microenterprise owners are beneath the World Bank’s poverty line of $1.90 per day, in purchasing power parity, if the business were their only source of income.

“When asked why owners had chosen to start their businesses, 24 percent of owners responded it was because they lacked alternative opportunities to generate income,” the report says.

“When asked about the biggest constraints to expanding their business, 45 percent of respondents reported that it was a lack of customers, competition or the profitability of their business model.

If formal employment is not generated to keep pace with population growth, this competition is likely to intensify as those without other opportunities increasingly join the informal sector,” it further says.

Launched at Pearl of Africa Hotel, Kampala today, the report reveals that it’s unlikely the majority of informal firms will be able to grow and generate jobs for others. “Using a range of indicators, our analysis indicated that only 18% of firms have potential to grow and expand,” it says.

On location and access to markets, the report says Kampala’s informal sector clusters in locations in close proximity to the central business district, indicating that location and access to customers are critical for informal firms. It further reveals that 97% of informal businesses were found to sell to other households or individual customers as opposed to other businesses.

The report says 84 percent of businesses sell to customers within a 30-minute walk.

To reach its potential, the report says Greater Kampala Metropolitan Area needs to generate more jobs but also the right kind of jobs. It further says Investment in manufacturing and tradable service sub-sectors can increase productivity and stimulate structural transformation.

“This calls for a deliberate policy transition of the role of sub-national government, from merely being a regulator of businesses to a facilitator of private sector growth and job creation. Currently, sub-national governments main relationship with the private sector is one of taxation and regulation. And yet, the private sector faces major constraints in their ability to grow and create jobs, many of which could be alleviated by the sub-national and national government,” it says.

The report makes three main recommendations to the subnational governments of Greater Kampala, to play a greater role as a facilitator of private sector success in the city. The recommendations are; investing in coordinated transport and economic infrastructure together with land use management, empowering domestic firms to improve productivity and Capacitate institutions and coordination structures.