Mogadishu, Somalia – Somalia’s newly introduced 5% Value Added Tax (VAT) is being touted by the government as a lighter burden compared to the higher VAT rates of neighboring East African countries.
However, a closer examination reveals that while Somalia’s VAT rate is lower, its comprehensive application may place a heavier financial load on its citizens than the more nuanced tax systems of its regional counterparts.
Comparative VAT Rates
Kenya, Uganda, and Tanzania, all members of the East African Community (EAC), implement VAT rates significantly higher than Somalia’s 5%.
Kenya’s VAT is set at 16%, while Uganda and Tanzania each impose an 18% rate.
These countries, however, mitigate the impact on low-income populations by exempting essential goods and services from VAT.
In Kenya, VAT exemptions apply to basic necessities such as bread, milk, and vegetables, as well as educational and healthcare services.
According to Kenyan economist Bilow Kerow, this structure is intended to protect vulnerable groups from excessive taxation on essential items.
“The exemptions are critical in ensuring that the cost of living remains manageable for low-income families,” Keeroow told BBC Somali Service.
Uganda and Tanzania also employ similar exemption strategies, which help reduce the tax burden on essential goods and services.
Somalia’s VAT System
Somalia’s new VAT policy, by contrast, imposes a flat 5% rate on all goods and services, including those considered essential like food, healthcare, and education.
This universal application means that every transaction, regardless of its nature, is subject to VAT.
For example, a resident spending $100 on various items and services would pay $5 in VAT, even if their purchases include essential goods.
President Hassan Sheikh Mohamud has defended this broad-based VAT policy, citing a lack of alternative revenue sources for the government.
“Our only significant revenue comes from the small taxes collected from market traders,” Mohamud explained.
“Implementing VAT on all transactions is essential for financing national development and security efforts.”
However, economic experts express concern that Somalia’s VAT policy, while seemingly lower in rate, could impose a greater burden on its citizens compared to neighboring countries.
Ahmed Abdi, an economist based in Mogadishu, points out that taxing essential goods and services exacerbates the financial strain on an already impoverished population.
“The policy could have unintended consequences, such as increasing the cost of living for the most vulnerable,” Abdi said.
“A more targeted approach that exempts essentials might better balance revenue generation with economic fairness.”
The concern is that a blanket tax on all goods and services without exemptions could discourage spending on essentials, potentially leading to adverse effects on public health and education.
“When essential items like food and medicine are taxed, it inadvertently increases living costs for those who can least afford it,” Abdi noted.
In the meantime, while Somalia’s 5% VAT rate is lower than those in neighboring EAC countries, the lack of exemptions for essential goods and services means that Somali citizens may face a higher relative tax burden compared to their East African counterparts.
The uniform application of VAT across all sectors, including basics like food and healthcare, contrasts sharply with the more nuanced tax systems of Kenya, Uganda, and Tanzania, which shield low-income households from significant taxation on essentials.
According to Abdullahi Nur, a professor of economic, Somalia’s policy underscores a complex trade-off between generating government revenue and mitigating the financial impact on its citizens.
“Moving forward, a reassessment of the VAT policy to incorporate exemptions for essential goods and services could potentially alleviate the burden on its population while still achieving the government’s revenue goals.” He said.
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