Introduction
Somalia has been suffering economic turmoil over the last two decades since the outbreak of civil war in the country in late 1991s, in spite of that the economy has been recovering in slow motion usually due to the countenance of political instability in the country.
The business environment was growing during the last decade and done much more progress than even before the civil war muchly due to the liberalization of businesses society and the economy from the siad barre regime which conducted economic system of scientific socialism in its tenure, centrally planned by the state, thus private businesses were not allowed in to the country, after the central government was ousted, the economy was liberalized and people were free to run their own business activities to generate their own income.
small and medium enterprises are the most common types of businesses conducted in Somalia currently, as the country is on the verge of economic recovery there are no big businesses or multilateral corporations in the country, however small enterprises suffer and face many constraints and challenges towards expansion and development , as a result many people exist the market too early because of poor business strategy, reduction of their expected income, lack of market and many other reasons, however it’s been considered that higher tax rate from federal and state governments both formal and informal taxes damages business development specifically small and medium enterprises, tax is the most common way for generating revenue by the state, but needs much more amylases of how it affects business before it’s imposed on individuals and businesses.
Tax system in Somalia
Taxes are generally levied by the government and state governments, they collect official tax from individuals and businesses. though the government doesn’t generate higher tax revenue from the society due many reasons including the social attitude towards paying taxes, failure of government to reform the tax system, tax compensation from the state to some individuals etc. businesses pay tax in terms of how each spawn income to federal government and each state government collects taxes, which are set aside for its own use. The federal states collect sales taxes for their own use, resulting in huge costs for merchants to move products. Although the interim federal constitution is yet to be finalized, questions about how the central government and states will share power, what rights and responsibilities states will exercise, and how to share resources remain unanswered.
None-state taxes
checkpoints
Payments made by soldiers at checkpoints, often referred to as baad (representing extortion or informal taxation), can be a considerable expenditure for Somali citizens. An official from an electric company said: “We pay more taxes than official taxes.” A businessman from Mogadishu also explained: In our shop, there are 45 to 50 trucks lined up in a row., Trying to unload. The soldiers show up and you have to pay them. What if you don’t? They stopped working. You can complain to your superiors, but this means we will be wasting our time. The trucker also complained. It is easier to pay the government not to control these soldiers. Although government soldiers technically work for the federal government, they rarely collect this revenue on behalf of the federal government or federal member states. Instead, they raise funds for themselves, and the government is largely powerless to prevent them from doing so. This caused a strong discontent among the civilian population. (sagal Abshir, khalif abdirahman and Hannah stogdon) a study published on rift valley institute in May 2020.
Tax effects on business development
Generally speaking, Complex and excessive taxation has discouraged foreign investors, scared away domestic investors, inhibited entrepreneurship, and caused unnecessary losses due to tax compliance and tax avoidance costs, the taxes levied on SMEs affect profit growth in different ways. In Somalia, changes in tax rates increase the prices of various goods and services. Higher tax rates lead to higher prices because businesses are trying to earn profit out of the tax rate, so whenever prices go up due to higher tax rates consumption rates risen relatively. If consumption fall down, sales fall down as well, which reduces business profitability, resulting in slower growth, especially for small and medium-sized companies. More importantly, paying taxes is a form of business cash outflow, reducing the purchasing power of the business. This is because the large amount of cash collected is used to pay taxes rather than expand the business. As a result, the purchasing power of the business falls immediately after paying taxes.
Conclusion
Businesses in Somalia went through many different stages ever since the civil war, due to the economic stage of the country, currently there are no big businesses or major corporations in the country, but usually small business, small and medium businesses face major hindrances on developing their business and expanding it, those factors include tax imposed by the state which hurts those businesses usually negatively, other non-state or informal taxes are also levied to those businesses including checkpoints and militias, as a result prices of products tend to go up due to higher tax rates, consequently consumption rates have risen. They fell and sales fell, which reduced profitability, resulting in slower growth, especially for small and medium-sized companies.
Hassan Mohamud Mohamud is graduate of SIMAD University
