An outdated legal framework coupled with almost nonexistent administration remains a major impediment to domestic revenue mobilization in Somalia, the World Bank has said calling for dedicated review of legal frameworks both at federal and state level.
The Bank said in its second Economic Update for Somalia revenue collection is stifled by laws dating back 20 years when Somalia was a unitary state, poor enforcement and lack of clarity on revenue assignment in the Provisional Constitution among a host of legal bottlenecks.
“Laws based on a system in place when Somalia was a unitary state are not practical in a federal system of government and will be not possible to enforce beyond the capital city without clear parameters for revenue assignments negotiated by stakeholders and established in the constitution,” the report said.
The legal basis of taxation is also not fully established, the Bank said hence taxes on imports are based on weight, volume or unit basis denying the government the right amounts of revenue. It proposes a value based system where taxes will be calculated based on the value of the imports. The same applies to taxes on companies such as the telecommunication sector which pay lump sum of $4.8 million annually, the profit margins notwithstanding.
The Provisional Constitution is also not clear on revenue assignment and clarification of taxation powers, the report says noting, ‘it provides general guidance that revenue raising responsibility should be assigned to the level of government that can handle it most effectively’.
Article 50 (f) of the Provisional Constitution reads: The responsibility for the raising of revenue shall be given to the level of government where it is likely to be most effectively exercised.
A number laws critical to revenue collection and management are yet to be passed making it difficult to realize a reformed tax regime. For example, the report singles out the Public Finance Management Bill approved by Cabinet early last year but is yet to be debated by the House while the National Audit Bill is yet to receive the President’s assent. “Parliament approved the National Audit Bill in the first quarter of 2016; it has been sitting on the president’s desk since then.”
Lack of clarity in functional assignment between the Federal Government and member states and absence of fiscal relations between the two entities has resulted in cases of double taxation, retention of revenues by states instead of sharing with the federal government and lack of an objective criteria of allocation of funds to units below the state such as districts.
Despite these shortcomings, the government has registered remarkable progress thanks to reforms in various sectors. For example, the automation of the property transfer tax led to a 74% revenue increase in four months since inception with average income rising from US$52,300 to US$91,100.
The government has also restructured the Revenue Department creating the positions of Permanent Secretary and Director General of Revenue. This is a departure from the past where there were two tax directorates- Inland Revenue Directorate and Customs Revenue Directorate led by separate directors both reporting to the Director General of the Ministry of Finance.
Under the new structure, Directors of both the Inland Revenue Directorate and the Customs revenue Directorate now report to the Director General of Revenue. This new structure has improved the coordination and sharing of resources of the two directorates and given issues of revenue mobilization prominence within the Ministry.