Managing the Taxation of the Informal Business Sector in Mogadishu
Keywords:
Informal Sector, Taxation, Mogadishu, Municipality, Banadir, Somalia, SMEsAbstract
Somalia has been experiencing civil unrest since 1991. This has resulted in social, economic, and political instability, as well as the destruction of systems of governance, including the taxation culture. During this period of fragility, businesses of different sizes have, in general, grown informally and no public bodies have asked them to pay tax. The new government, which was established in 2012, has officially resumed tax collection operations in the capital city, Mogadishu. This is the country’s largest city. It hosts most of the informal business activities in the country and is the only fiscal space in which the Federal Government of Somalia (FGS) operates.
In this study, we use administrative data from the revenue department, together with information gained from interviews with experts and business owners, with the aim of showing how the revenue department managed to tax the informal business sector in Mogadishu (the FGS’s only revenue source) after re-establishing the tax system. It also considers the challenges associated with this and recommends several technical solutions. The findings show that, in Mogadishu, informality is common amongst small and medium-sized enterprises (SMEs). Although the government has increased taxpayer registration rates, begun to tax the sector indirectly, and improved licensing, the study shows that the nature of Somalia’s economy, the existence of undertaxed sectors, the limited administrative capacity, the high costs involved in enforcing compliance and formalizing businesses, and a historical weakness in terms of engaging with the business community continue to hinder the proper management of the taxation of the sector in Mogadishu.
We provide recommendations for both the federal revenue authority and revenue officers in the Mogadishu Municipality to help them to develop better administrative and enforcement measures. These measures could enable them to reduce the number of business activities that are taking place outside of the tax net. We also highlight the importance of sequencing the reforms, creating a promising environment for SMEs, simplifying the tax system, and providing taxpayer education.
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