“Tajik entrepreneurs will remember 2015 as a year of great challenges that forced thousands of them to quit their businesses. Meanwhile, even in times of crisis, the country has significant potential that would make the business climate more attractive for small business”, writes Konstantin Bondarenko, an economist (Dushanbe, Tajikistan), in an article written exclusively for CABAR.asia.
Tajik news agencies, citing the data from the Tax Committee under the Government of the Republic of Tajikistan, reported more than 22 thousand cases when individual businessmen ceased their activities in Tajikistan during ten months of the current year[i]
The tax authorities consider it a normal phenomenon in the system of simplified registration of business entities existing in Tajikistan. However, entrepreneurs, as a rule, refer to two points as the main reasons for the closure of their businesses – “crisis” and “too much pressure.”
Economic crisis: the strongest will survive?
We could talk about the mediocrity of the situation, when someone closes business, and someone opens it, however, Tajikistan’s economy is in a phase of serious recession. Tajikistan, in its time, got “addicted” to the use of supportive external environment, and the main factor of economic growth were abundant flows of remittances from migrant workers, which increased household incomes and consumer demand.
Small businesses, in that sense, have become hostage to the overall systemic problem. The vast majority of individual entrepreneurs are concentrated in trade and services sector, where there are fewer risks, and significant financial resources and knowledge are not required.
On the one hand, it is absolutely normal. If there is not a shop selling clothes in your village, you can open a shop, buy things on the wholesale market in the city, sell them for a higher price, and you have some income. Taxes, rent, inspection are, of course, an unpleasant part of the process, but as long as there is demand, lays all costs in the price, after all, you can always “negotiate” with inspectors.
Even the imperfect Tajik system of regulation and taxation of individual entrepreneurs could work as long as their products were sold well. But the events in the outside world have changed the situation radically. Problems in the Russian economy have had a direct impact on the prospects for business in Tajikistan.
So, according to the Central Bank of the Russian Federation (the website of the National Bank of Tajikistan does not have such information, unfortunately), remittances from Russia to Tajikistan fell almost three times during the first nine months of 2015 compared to the same period of the previous year[ii]
The decline began in 2014, but then, the remittances for the first three quarters amounted to more than three billion dollars. Today it is a little more than 1 billion dollars. The average amount of one transfer, which reached 255 dollars in 2012, fell to $ 150 in 2015.
Thus, the main source of demand for goods and services supplied by small businesses in Tajikistan got much weaker. The significant devaluation of the Somoni and the rise in the dollar exchange rate have dramatically affected the price of imports. As a result, demand for all kinds of goods fell significantly, except for essential goods. Tajik markets have gradually become empty.
The drop in demand, problems with the return of loans, and the recent greatly increased pressure of fiscal and other authorities are not just “temporary difficulties” for small businesses. This is an extreme situation, when a rude Russian saying “While a fat person is losing weight, a thin person dies” perfectly reflects the situation.
In addition to purely economic reasons for the sharp deterioration of the situation, an important role is played by the factor of regulation and taxation. A serious blow to small business was the adoption in 2012 of new rules for taxation of individual entrepreneurs, operating on the basis of patents or licenses (Decree of the Government of the Republic of Tajikistan №451).
As a result of the new rules, a significant part of the activities previously allowed under the patent were excluded from the list, while for the remaining activities, the rate of taxation was significantly increased. At the same time, the level of taxation for businesses that operate on the basis of license has also increased.
In 2013, there was a massive transfer of private entrepreneurs who had previously worked on the basis of patent to registration on the basis of license. But, at the same time, a significant number of those who had worked on the basis of patent chose to cease their activities or withdraw into the shadows.
In the same year, obviously realizing its mistake, the government slightly softens the new rules, but in their new edition, the number of activities under the patent is limited to only 49 points.
Absolutely all kinds of small (actually home) production and a very large number of services were excluded from the list of patents. Earlier, in the previous rules, there was a good definition of “non-industrial production.” All small artisans (a very common, and important activity in the national culture) could work on the basis of a patent. Now it is impossible. Another example of the new rules: you can sell bread on the basis of patent, but you cannot bake for sale. To do this, you need license (well, at least, you do not need to create a joint-stock company). Of course, you can bake bread at home, but try to prove that it is for sale. Or if a seamstress gets commissions at home, she usually does not care about buying a patent. But if she decides to rent a small room, she will have to obtain a license and keep records of income. But why so many restrictions, if they can be easily come round, or they are unwise, to put it mildly? The tax authorities justify the need to reduce the number of activities on the basis of patent, saying that the patent form was needed only during the transitional time in the period of economic and social instability in Tajikistan, and now it’s time to give it up. A common argument is also an allegedly a strong temptation to use the patent mode, even if the business of an entrepreneur does not meet its conditions.
Indeed, some of the criteria of the patent system are difficult to verify. How, for example, one can check the compliance with the maximum annual income of $ 100 thousand Somoni, if those pursuing activities on the patent basis are not required to keep records of income? In fact, the only obligatory document for them is the patent itself and the receipt for payment of taxes.
However, there is a very clear criterion that is applied to this category of entrepreneurs – the impossibility of using hired labor. Those working on the basis of patent do not have the right to hire workers. They should work only individually. If there is such a criterion, why not to expand the list of activities? In other countries, such as in neighboring Kyrgyzstan or Ukraine, there are hundreds of activities in the list of patents. Moreover, they are conveniently grouped, and the criteria for inclusion in this or that kind of activity are very clear. In the Tajik version, such a diverse set of services as the “outdoor repair and shoeshine, mediation in the market, carpets trimming, weighing services, knives and tools sharpening, street phone, key making” (the 38th category) may be all in the same category of a patent. At the same time, such a service, as a “mediation in the market” can be interpreted quite arbitrarily. Prices of patents are also very controversial. If they are very reasonable for many activities, they can be high for other activities. For example, in order to sing at the celebrations, one has to pay 601 somoni per month. This is quite an impressive amount, especially when you consider that this activity depends on season, so one has to pay taxes even without getting income.
Almost a similar example is leasing the wedding dress (there are also restrictions – “except for the cities of Dushanbe, Khujand, Kurgan-Tube and Kulyab”): the amount of tax is 490 somoni. For small settlements (because obviously, in large cities, one can work only having a license) it means that one has to work just to pay taxes.
Somehow, the tax rate for selling of “naswar” (chewing tobacco) is 267 somoni, and it is higher than the rate of tax for sellers of spare parts (222 somoni). Another interesting example of the trade group is the rate of 267 somoni for the category of “selling flowers”. How is this justified? Are there celebrations in Tajikistan every day, when people massively buy flowers?
But even with high tax rates in some categories, the patent system has one major advantage – the rate is fixed. This gives certainty and great convenience for individual entrepreneurs. One can easily calculate his/her profits and does not have to spend time for complex accounting.
In turn, an approach aimed at reducing opportunities for entrepreneurs working on the basis of patent does not take into account the actual level of financial and legal literacy of the population in Tajikistan.
The sector of micro-businesses is mainly occupied by people who do not have sufficient education. For the overwhelming majority of these people, full records and reporting (what is required in the case of license) are a great difficulty, and they most likely prefer to work illegally or leave for labor migration.
No matter what developers of such a system meant. What matters is that it does not work in reality. The majority of individual entrepreneurs operating under the license do not keep full accounting of income (not to mention the expenses), do not enter into official labor relations with employees (or do it not with all employees), and they pay taxes not from the real turnover, but on the basis of “consensus” with the tax inspector.
Taxation of individual entrepreneurs (especially in the regions) is often semi-arbitrary. And now, when there are problems with the implementation of a plan to collect taxes, they are forced to inflate the declared income and pay taxes “in advance” for a few months in advance. It turns out that businessmen are working in a situation of uncertainty – how much to pay as taxes, which “voluntary-compulsory” extortions should be expected, etc.
De facto system of individual entrepreneurs operating under the license acquired distorted features, becoming similar to the patent system. The social tax for entrepreneurs operating on the basis of license mostly fixed, and VAT is replaced by “negotiable” tax. The problem now is that it is more difficult to negotiate. Despite the fact that individual entrepreneurs, taken together, do not bring even 3% of budget revenues, they experience no less pressure than large “sharks”.
So what is a “strategic” plan to force businesses to move to larger organizational forms? Experience shows that the tax base is not expanding, because many hide the real turnover, or even quite their activity.
Isn’t it better to create more appropriate rules, under which an individual working entrepreneur can obtain a patent for almost any type of activity? But if he intends to hire employees or to engage in import and export of commodities (another existing criteria for the certificate), he will have to work on the basis of license.
And finally, what are the real benefits of the status of an individual entrepreneur working according to the license in comparison with the status of a legal entity operating under the simplified system of taxation? The answer is no. All obligations for both categories are almost identical. In both categories, one has to keep records of income, submit reports and use control-cash machines in the calculation. The only difference is that individual employers are not obliged to hire an accountant, keeping records on their own.
On the contrary, the status of a legal entity has a number of advantages, such as the opening of separate subdivisions, the implementation of excisable activities and great opportunities for foreign trade operations. The actual mode of individual entrepreneurs working on the basis of license can be described as “neither here nor there”. They are deprived of the benefits of both the patent system and of legal entity.
In addition to these concerns, the text of the Rules contains errors, inconsistencies and ambiguity. How, for example, can one understand the phrase “the social tax rate, taking into account the zonal coefficients of the individual entrepreneur, regardless of the income received, cannot be lower than the maximum rate of the social tax taking into account the zonal coefficients set for individual entrepreneurs operating on the basis of license”?
A document that regulates the activities of persons, most of whom have no special economic or legal education, in general, should not contain long and complex phrases, moreover the phrases formulated incorrectly.
As a result, many suffer. Entrepreneurs are forced to cease their activities, otherwise they risk losing not only their investment in the business. The crisis in the economy and pressure from government agencies can lead to situations when, for example, one has to sell his house. Consumers will have worse conditions for the acquisition of goods and services, both in terms of convenience and in the additional rise in prices, because there will not be proper competition. The government in this case will not get any taxes; instead, it will receive social problems – thousands of people and their families are left without a source of income.
Only the corrupt part of officials will win – they “milk” the business while it is still alive. They still make good money on business liquidation, which is rather a difficult procedure even for individual entrepreneurs.
It does not constitute substantial labor and does not carry risk to make the system of regulation and taxation of individual entrepreneurs simple and more attractive.
As already noted, budget revenues are practically independent of tax paid by individual entrepreneurs whose activity is based on the patent system. There is not any fiscal importance. Even though thousands of people will start using patents, those who need large-scale activities or full import and export operations will still work in other organizational forms.
On the other hand, although their fiscal importance is negligible, the number of taxpayers in this sector is very large – a few tens of thousands of people, and with an enabling approach, there will hundreds of thousands, who in turn provide means of living for several family members. It is a very socially significant segment of the economy.
Therefore, the main objective of economic policy in small business, and especially in times of crisis, is to provide employment, rather than budgetary revenues. This is the easiest way to legalize the huge number of self-employed people, to give them the opportunity to provide themselves with the means of subsistence, as well as to positively influence on the reduction of labor migration from Tajikistan.
An effective measure for the development of small business in Tajikistan could be the adoption of new rules for the taxation of individual entrepreneurs. Moreover, implementation of such a policy does not require a significant investment of time and resources. Actual new rules can be developed during two months maximum.
It is necessary to expand the list of activities that can be carried out on the basis of a patent. The list should include at least 200 activities that are carried out mainly individually, without hiring additional workers, and which are unlikely to use the patent system to conceal major turnovers.
These are primarily various types of non-industrial production, repair services, individual (without the creation of workshops) tailoring works, individual carpenters and others, unjustifiably excluded from the list previously. Also services such as – translation services, hairdressing and others should be added in the list, too. Many of the activities actually are not even business, they are more characterized as “craft”, so the taxation system on the basis of license for such activities is an obvious mistake.
It is also necessary to review the system of taxation of individual entrepreneurs operating under the license. It is difficult to make it more attractive than the regime for legal entities, working on a simplified system. Therefore, it is necessary to make a more radical step and eliminate individual entrepreneurship based on license, bringing all those who work individually to the system of patents, and all those who, in fact, work in the format of enterprise should be converted into such form as a Limited Liability Company.
The text of the new rules must be set out clearly and competently. It is desirable to provide for their publication in several languages (primarily Uzbek and Russian), in order to avoid contradiction in different language versions.
Finally, it is necessary to abandon the endless checks, “advance” payments and other measures of pressure on business entities. The use of administrative resources of the state authorities in the work with fine violators is in any case extremely inefficient. In order to replenish the budget, it is best to conduct an audit of state enterprises and give fewer benefits to them.
Unfortunately, a number of international organizations, especially financial institutions, are skeptical of such things as simplified tax regime and, especially, the patent system. But the political will of the leadership of the country should overcome this obstacle. After all, support for small and medium businesses and a steady increase in their share in GDP are defined as a priority in the National Development Strategy of the Republic of Tajikistan.
Now the moment of truth has come, when it is time to abandon the idea to keep the business on a “short leash”, providing businessmen with clear and fair rules of the game. It is time to move from strategic planning and good intentions to the implementation of motivating policies with regard to small business.
Konstantin Bondarenko, economist (Dushanbe, Tajikistan)
The views of the author do not necessarily represent the views of CABAR.asia