particular trader to operate in a designated locality. As a consequence, the _Machingas_ were encouraged to organize themselves for self-policing against new traders without a proper license. How effective the itinerant trade licensing is in regulating _Machinga_ HEs, however, is not clear.

98. _Enforcement:_ Under the new BARA Act, businesses found doing business illegally are fined between Tsh 50,000 and Tsh 100,000,<sup>25</sup> a steep penalty rate to which HEs are likely to be subjected. BARA also effectively excludes about 90 percent of HEs as part of its simplification process. This begs the question: How will HEs exempt from BARA‟s provisions (because they have no fixed premises) know that LGAs have no authority to penalize them over their lack of a registration certificate? There is no explicit campaign to inform HEs not required to get a certificate of their rights as a business entity.

99. Considering the above challenges with the new national regulation, it is tempting to suggest that the problem of formalizing the HE sector can be resolved by focusing on regulations (i.e., registration, licensing, and taxation) by local governments. It is important to emphasize, however, that such an approach is not necessarily a panacea and requires a much more in-depth analysis of the costs and benefits of formalizing HEs. The experience of HEs in Uganda sheds light on the complex issues involved and how the system of licensing and taxing HEs can be easily abused by local authorities (Box 5.1).

# **Box 5 1: Regulating Household Enterprises in Uganda**

Under Uganda‟s decentralization program, the registration, licensing, and taxation of larger businesses is the responsibility of the national government, while regulation for small businesses rests with local governments, which are also responsible for providing services such as police protection, market places, etc. Businesses with a monthly income below USh 500,000 or an annual income of USh 5 million (about USD 250 and USD 2200, respectively) are considered small, and these are exempt from the national business tax and national registration.

Placing the responsibility for registration and taxation with LGAs has not simplified the process for small businesses. Applications for registration and for obtaining a trading license are two separate steps that require multiple visits to various offices. Businesses also have to pay user fees upfront (e.g., to use market facilities), as well as various other types of local government fees (“operating permits”), which differ by location. Because of the high transaction cost involved, more than half of household enterprises opted not to register, but obtained a trade license and/or paid some other local fees in one form or another.

Compounding the problem of multiple tax payments faced by HEs is the large variation in the number and amount of fees paid by them. For example, within the same sector or turnover category, some HEs ended up paying a higher amount than others simply because they paid more types of fees. Moreover, HEs in the high turnover category were more likely to report paying two or more fees than HEs in lower turnover categories. This suggests that high turnover HEs were targeted for multiple fee collection though they were not necessarily engaged in more activities. Not only does this practice discourage HEs from diversifying their activities or growing their enterprise; it undermines their viability.

Most important, the taxation of HEs by local governments is extremely regressive. The average fee paid by them was USh 83,400 per year. On the basis of their median income this amounted to a tax rate of 30-50 percent, while the national tax rate for large businesses is only 3.2 percent. Close to a third paid more than one type of fees, which indicates that HEs were taxed multiple times. Since the fees are fixed amounts, the poorest HEs pay the most. Fees and taxes on HEs went up dramatically after the abolition of the other main source of tax revenue for LGAS -- the individual tax (graduated tax) – following the elections.

> 25 This amount applies to businesses with a yearly turnover not exceeding Tsh 20 million.  For those with a turnover The lack of standardization and transparency in the setting and collection of fees paid by HEs presented many of more than Tsh 20,000, the fine is between Tsh 200,000 and Tsh 500,000. opportunities for corruption and abuse of authority by local government officials.  Even if the overwhelming majority chose to remain in the informal sector by not registering, the case of Uganda demonstrates that HEs face 43 the burden of paying a large share of local taxes in order for them to start and continue to operate their business.

_Source: World Bank, 2009._