Mogadishu(Mogadishu24)-The imposition of a 5% sales tax by the Somali government on all goods and services introduces significant challenges for a population already grappling with high living costs and inflation. This policy, affecting both essential items like bread and luxury goods such as perfume, adds further strain on the Somali people, raising critical questions about its implementation, legality, and overall impact.

Firstly, the legality of the tax is highly questionable. Yahya Amir, an economist, asserts, “The tax lacks parliamentary approval, which is essential for its legitimacy. Proper legislative processes, including endorsements from both the Upper and Lower Houses of Parliament, have not been followed.” This oversight casts serious doubt on the tax’s legality and undermines the government’s credibility.

Moreover, the arbitrary nature of the 5% rate complicates the issue further. Effective economic policies should be grounded in robust data, including monetary circulation and citizens’ capacity to pay. Without such foundational data, the tax appears unjustified and poorly planned. Ali Halane, Journalist, columnist and Former Correspondent at BBC Arabia, “A tax policy must be based on clear economic indicators and the capacity of the populace to shoulder the burden. The current approach seems to lack these considerations.”

The Somali government’s infrastructure for collecting this tax is inadequate. Relying on private banks to collect taxes highlights a significant gap in the government’s capacity and infrastructure. Most transactions in Somalia are cash-based, and only a small percentage of the population engages with banking services. This reliance on banks excludes the majority of the population, undermining the tax’s efficacy and fairness. 

Citizens need assurance that their taxes will translate into tangible benefits. However, with banks as intermediaries, there are concerns about whether the collected taxes will reach the Central Bank and be utilized effectively. Mohammed Hirmoge, a journalist, Former Head of Strategic Communications at Villa Somalia,

“Citizens need to trust that their taxes are being used for their benefit. The current system lacks transparency and accountability, which is crucial for any tax regime to be successful.”

The uniform 5% tax on both essential and luxury goods disproportionately burdens lower-income populations, exacerbating existing economic inequalities. For those already struggling with high living costs and inflation, this tax adds an unwelcome financial burden. 

Kenya has undergone significant changes in its tax policies, characterized by the introduction of digital tax systems and aggressive tax enforcement. The Kenya Revenue Authority (KRA) has implemented robust systems for monitoring and tracking transactions, including digital payment integration.

Somalia, in contrast, lacks the necessary systems and infrastructure to monitor and enforce the new 5% sales tax effectively. The tax order is limited to South Central regions, excluding areas controlled by Al-Shabaab. This exclusion further complicates enforcement and compliance.

Kenya has established comprehensive data collection and monitoring systems, actively enforcing tax compliance through integrated digital platforms. Somalia, on the other hand, faces challenges in enforcing compliance due to the lack of systems and capacity. The legality of current tax collection methods is also under question.

Kenya’s relative political stability aids in uniform tax enforcement across the country. Somalia’s political instability and regional disparities, however, pose significant challenges to uniform tax enforcement. The new tax order covers only specific regions, raising concerns about fairness and consistency.

Kenya’s tax reforms have faced resistance but have been pushed through with a clear strategy and public engagement. Somalia’s new tax has been met with criticism, particularly from Mogadishu, which perceives the burden as unfair. The lack of trust between businesses and the government exacerbates the situation.

Kenya has invested significantly in building the capacity of tax authorities and infrastructure. Somalia lacks such investments and relies heavily on external systems managed by banks. This reliance highlights the need for Somalia to develop its infrastructure to support effective tax reforms.

While Somalia faces significant challenges, there is potential for a tax revolution if the government addresses existing issues. Learning from Kenya’s experiences, Somalia can develop a phased approach to implement tax reforms, starting with building the necessary infrastructure and legal frameworks, and gradually moving towards comprehensive reforms.

The tax does not exempt essential items, burdening lower-income residents. The urgency to find new income sources due to the World Bank cutting budget support has led to poorly planned tax policies. Pervasive corruption has hampered efforts to effectively tax and regulate lucrative sectors like telecommunications and banking.

The Ministry of Finance lacks systems and data to manage and monitor businesses effectively. An investigation by Dawan TV revealed that the claimed capabilities of a new tax system are not yet functional. The ministry’s reliance on banks to expedite tax collection faces legal, practical, and trust challenges.

The new tax applies only to South Central regions, excluding areas controlled by Al-Shabaab, which raises concerns about its uniformity and fairness. Mogadishu, contributing significantly to federal revenue, views this decision as unfair and demands equal treatment.

The financial committee of the Parliament has warned about the unlawful methods of tax collection and urged the government to seek new legislation, ensuring that representatives of the people are involved in the process.

In conclusion, the Somali government must adopt a more transparent, practical, and equitable approach to fiscal policy, ensuring that any imposed tax is legal, justified, and beneficial for the entire population. Instead of relying on arbitrary measures, policies should be grounded in the real economic situation, aimed at promoting stability and sustainable growth.