Introduction
In the bustling markets of Mogadishu, where traders sell everything from fresh produce to imported goods, a subtle yet profound change is taking place. Since August 18, 2024, Somalia’s federal government introduced a 5% Value-Added Tax (VAT) on most goods and services, marking a significant step towards modernizing the country’s tax system. Unlike traditional sales taxes, VAT is collected at each stage of production and distribution, ultimately borne by the end consumer. As part of a broader strategy to reduce dependency on foreign aid and enhance self-reliance, VAT implementation is a bold move towards economic reform.
However, implementing VAT in Somalia, especially in a city as diverse as Mogadishu, is no simple task. The economy’s informal nature, varying business practices, and regional resistance pose significant challenges. Yet, if executed properly, VAT could transform not only public revenue streams but also the way businesses operate and grow.
Understanding VAT in the Somali Context
The 5% VAT in Somalia is structured as a consumption tax levied on most goods and services, with businesses responsible for collecting it from consumers at the point of sale and remitting it to the government. To enhance compliance and efficiency, the government uses mobile money merchant accounts to monitor and automatically deduct the tax from transactions. This digital integration, while innovative, presents both opportunities and challenges, especially in a country where many businesses still operate informally.
While the VAT system aims to be nationwide, its implementation has faced resistance, particularly in regions like Jubbaland. Additionally, small businesses, especially those in peripheral districts, often lack the capacity to comply, either due to limited digital literacy or inadequate infrastructure. These challenges highlight the need for tailored strategies to ensure VAT adoption without overburdening local enterprises.
Types of VAT and Their Relevance
Different types of VAT are applied depending on the nature of goods and services. The standard VAT in Somalia is set at a rate of 5%, which applies to most consumer goods and services. Some goods and services, however, may fall under a zero-rated VAT category, meaning they are taxed at 0% but businesses can reclaim VAT paid on inputs. This is often applied to essential items like basic foodstuffs and exports. On the other hand, some services, such as healthcare and education, are VAT-exempt, meaning no VAT is charged, and businesses cannot reclaim VAT on related inputs. Additionally, VAT on imports ensures that goods brought into the country are taxed at the same rate, maintaining parity with domestically produced goods.
Challenges of VAT Implementation in Somalia
While the introduction of VAT marks progress, several challenges hinder its effective implementation. The most significant challenge is the dominance of the informal economy. Many businesses in Somalia, particularly small vendors and street traders, operate without formal registration, making it difficult to integrate them into the VAT system. For instance, in Mogadishu’s Bakara Market, numerous traders lack the necessary digital tools for VAT compliance.
Another critical issue is the lack of public awareness. Many business owners and consumers view VAT as an additional burden rather than a tool for development. This perception is partly due to insufficient government efforts to educate the public on the purpose and potential benefits of VAT. Compliance costs also pose a challenge, especially for small and medium-sized enterprises (SMEs). Managing VAT records, adhering to digital transaction requirements, and understanding tax obligations can be daunting for businesses with limited financial literacy.
Moreover, the risk of corruption and tax evasion remains high. Weak institutional frameworks can lead to misuse and underreporting of VAT collections, undermining public trust and the effectiveness of the tax system.
Benefits of VAT for Somalia’s Economy
Despite these challenges, the potential benefits of VAT are substantial. VAT provides a stable revenue stream that is essential for funding public services such as healthcare, infrastructure, and education. By taxing consumption rather than income, VAT captures revenue from a broader base, including informal sector participants when they purchase goods and services.
Another key advantage is economic formalization. VAT requires businesses to maintain accurate financial records, promoting transparency and reducing the size of the informal economy. This formalization not only improves tax compliance but also supports better business practices. Moreover, integrating mobile money in VAT collection is fostering digital financial inclusion. In urban centers like Mogadishu, the use of mobile money for VAT transactions has made the tax process more manageable for many vendors, promoting financial literacy and secure transactions.
Furthermore, by boosting domestic revenue, VAT can help reduce Somalia’s reliance on foreign aid. As the government builds fiscal capacity, it can more effectively invest in long-term development projects, strengthening economic resilience.
Strategic Recommendations for Effective VAT Implementation
To maximize the impact of VAT and minimize resistance, a multi-faceted approach is essential. First, public awareness campaigns should be launched to educate businesses and consumers about the purpose and benefits of VAT. This could involve using community leaders, media channels, and mobile platforms to reach a wide audience.
Second, the government should invest in capacity building for small businesses. Providing training on digital financial management and VAT compliance can help SMEs adapt without significant disruption. Additionally, fostering regional flexibility is important. Developing VAT enforcement strategies tailored to local contexts, particularly in regions like Jubbaland, can ease the transition.
Improving digital infrastructure is also crucial. Expanding mobile money networks and supporting businesses in adopting digital payment systems will ensure seamless VAT collection. Finally, transparency in how VAT revenues are used can build public trust. Demonstrating tangible improvements in public services funded by VAT will show citizens the direct benefits of their contributions.
The Way Forward
VAT implementation in Somalia is not just a fiscal adjustment—it represents a step towards economic sovereignty and modernization. As Mogadishu leads the way, addressing the challenges of public perception, digital integration, and regional disparities will be crucial for success. Through continuous engagement with the business community, investment in capacity building, and transparent governance, VAT can become a cornerstone of Somalia’s economic stability and growth.
If effectively managed, VAT will not only boost revenue but also modernize business practices, reduce informal economic activities, and lay the groundwork for a more resilient and self-reliant national economy.
Ali Ibrahim Mohamed, Dean, Faculty of Acountancy
