Can sales tax be effective In Somaliland’s informal economy? Challenges, Impacts, and Policy solutions

The new president of Somaliland Mr. Abdirahman Cirro recently proposed the introduction of a sales tax, the first proposal of its kind in the country. The proposal includes taxation on sales conducted through merchant accounts linked to mobile money platforms such as Zaad, E-Dahab, MyCash, and Sahal, as well as transactions made via bank e-wallet systems. Additionally, the policy extends to taxing telephone calls, SMS, and internet data usage. This ambitious initiative is intended to expand the country’s tax base, enabling the government to generate the revenue necessary to finance essential public services and development projects.

Sales tax is a consumption-based tax levied on goods and services at the point of sale. It is typically paid by the customer and collected by businesses, which are responsible for remitting the tax to the government. A standard sales tax applies a flat rate to all goods and services, making it straightforward but potentially regressive. Value Added Tax (VAT) is a multi-stage tax imposed at each stage of production and distribution, ensuring that taxation is based on the value added at every step. Another widely used system is the Goods and Services Tax (GST), which functions similarly to VAT but often applies a single uniform rate across all goods and services.

Given Somaliland’s predominantly informal economy, where a vast majority of businesses and individuals operate outside the formal banking system, the feasibility and effectiveness of the newly introduced sales tax policy remain uncertain. The absence of a structured financial reporting system, limited tax enforcement mechanisms, and weak integration between mobile money payment platforms and formal banking institutions pose significant challenges to the implementation and compliance of the new sales tax.

In this article, the ISIR Institute examines the viability of the proposed taxation framework, assessing its potential economic impact, key challenges, and broader implications for businesses and consumers. Furthermore, it identifies fundamental reforms necessary to establish a more efficient and transparent tax administration system.