Tax awareness and the financial performance of manufacturing SMEs in Uganda: a necessary but not sufficient condition

Background Tax awareness is widely believed to improve the financial performance of small and medium enterprises (SMEs), but empirical evidence is mixed, and it is unclear whether reported associations are confounded by respondent characteristics or by the wider taxation system within which awareness operates. This study tests the relationship between tax awareness and knowledge and the financial performance of manufacturing SMEs, and its robustness to demographic controls and to the taxation system as a whole. Methods A correlational, cross-sectional survey was administered to a census of 60 manufacturing SMEs in Kasese Municipality, Uganda, achieving a 98.4% response rate. Tax awareness and financial performance were measured with five-point Likert scales. Simple and multiple ordinary least squares regression, with heteroscedasticity-robust standard errors, tested the direct relationship and its robustness to demographic controls to education as a moderator, and to the wider taxation system. Results Tax awareness was positively and significantly related to financial performance (r = 0.670, R 2 = 0.449, F(1,58) = 47.28, p < 0.001). This relationship was materially unchanged after controlling for gender, marital status and education (β = 0.703, p < 0.001; R 2 = 0.466), none of which were significant predictors, and was not moderated by education (interaction p = 0.661). However, when tax rates and tax administration were added simultaneously, tax awareness’s distinct contribution to financial performance was statistically absorbed (p = 0.578), while tax administration emerged as the dominant predictor (β = 1.033, p < 0.001). Conclusions Tax awareness’s association with financial performance is genuine and not a demographic artefact, but it is not independent of the wider taxation system: it functions as a necessary but not, by itself, sufficient condition, realised through engagement with tax administration. Awareness-raising interventions are therefore unlikely to improve SME financial performance unless paired with parallel investment in service-oriented tax administration.