Tajikistan has a complex tax administration system and high tax burden on manufacturing enterprises, the World Bank said in a report. Experts Manouchehra Madchonova and Merali Bodurshozoda in an article specially for CABAR.asia say that in the near future a new version of the Tax Code of the Republic of Tajikistan will be submitted for public discussion.
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Short review of the article:
There is a complex tax administration and exorbitant tax burden on business in Tajikistan, the World Bank report said;
The current tax system does not sufficiently contribute to the expansion of entrepreneurial activity, the creation of medium and large enterprises and new jobs in the country;
A draft of new edition of the Tax Code (TC) has been developed, which will be put up for public discussion on July 1;
The new edition of the Tax Code should minimize discrepancies, as well as contradictions that allow ambiguous interpretation of the rules and their arbitrary application;
It is also expected to simplify tax administration, reduce the tax burden on businesses, increase tax collection by improving the quality of services, and gradually moving the business out of the shadows into 0the legal sector.
High taxes undermine business incentives
Tajikistan, in line with any other modern state, is obliged to fulfill social functions. This requires significant government spending, the source of which is the tax revenue.
So, on the one hand, the growth of government spending requires the greatest degree of consolidation of the country’s financial resources through taxes. On the other hand, it is advisable to adhere to the optimal level of tax burden to stimulate the process of investment and business development.
Indeed, under any economic system, taxes, although they essentially express the priority of public interests, remain administrative-command measures of state regulation in form. Based on this, the effectiveness of tax policy should be determined by the level of investment attractiveness of the business environment and payment discipline of taxpayers, as well as the level of stimulation of business economic activity. Let us consider the example of a manufacturing enterprise, and how attractive is the business and investment climate today.
Table 1.[1] Assessment of the Taxation indicator of the Republic of Tajikistan in the Doing Business 2020 report of the World Bank
According to the methodology for evaluating the Doing Business report, a medium-sized manufacturing company makes 7 tax payments per year, the processing and payment of which takes 224 hours per year or 32 hours for one tax payment. In the countries of the region and the OECD, although the number of tax payments is longer, the time for processing of one payment takes half the time, i.e. 14.8 hours and 15.4 hours respectively.
At the same time, the tax burden on a medium-sized manufacturing enterprise according to this study is 67.3% of commercial profit, which is more than double the weighted average for the region and OECD countries.
Whereas, according to Laffer’s concept, high tax rates (more than 35-40% of commercial profit) undermine incentives for entrepreneurship, make investments unprofitable for expanded reproduction, hinder the growth of scientific and technological progress, slow down economic growth and lead to a decrease in tax revenues budget, which creates a vicious circle or the so-called “tax trap”.[2]
This contributes to the formation of entire groups of taxpayers engaged in the search for tax evasion methods and seeking to concentrate financial resources in the shadow sector of the economy.
According to the IMF study,[3] the level of shadow economy in Tajikistan is 37.7% of GDP, which is significantly higher than the regional average (31.7%) and global average (27.8%) of this indicator, which shows the enormous potential of tax reforms.
Thus, a comparative analysis of tax payment procedures and the tax burden in Tajikistan with the countries of the region and the OECD indicates a difficult tax administration, exorbitant tax burden on manufacturing entrepreneurship and insufficient business climate in our country.
In this regard, improving tax administration and determining the optimal level of tax burden remains an urgent issue for further reforms of the tax system in Tajikistan and the development of a market economy as a whole.
Difficulties in moving from small business to medium
The current tax system, while supporting micro and small businesses, provides simplified taxation regimes for physical persons engaged in individual entrepreneurial activities on the basis of a patent or certificate, for small businesses and agricultural producers, within which the country has created the most favorable conditions for their creation and development.
These measures have contributed to the fact that today micro and small businesses dominate in the structure of the country’s private sector, the share of which is 90.5% of the total number of business entities in the country. These are, first of all, individual entrepreneurs operating on the basis of a patent, certificate and as farms, the annual turnover of which does not exceed 1 million somoni.
At the same time, entrepreneurial entities created and functioning as legal entities and representing medium and large enterprises comprise only 9.5% of the private sector.[4]
Despite the imbalance in the structure, today the private sector provides 79% of tax revenues to the state budget, 68% of the population’s employment and 70% of the country’s GDP. Promoting the development of small business also contributes to improving the well-being of the population and reducing poverty in the country, where reducing the latter to 28%.
It should be recognized that the current tax system does not sufficiently contribute to the expansion of entrepreneurial activity, the creation of medium and large enterprises and new jobs in the country. With the transition to medium and large business, a shift to the general taxation regime is carried out, which means complex tax administration, numerous scheduled inspections and other interference from regulatory authorities.
At the same time, the legislation of Tajikistan provides for business representatives with a wide system of guarantees, benefits and preferences,[5] which place an additional burden both on the state budget in the form of lost revenues and on domestic entrepreneurs who do not enjoy or use such benefits.
According to World Bank studies, the determining factor for investors is guaranteed protection of their investments, the availability of natural resources, the possibility of acquiring ownership of real estate and tax conditions, in particular the stability of the tax system.[6]
Nevertheless, according to Arthur Laffer, the provision of tax benefits is necessary in order to support industries of social importance.[7]
In accordance with the National Development Strategy of the Republic of Tajikistan for the period until 2030, it is envisaged to improve tax administration in order to increase tax collection, reduce the administrative burden on responsible taxpayers, increase transparency and predictability of the tax system, as well as change tax legislation aimed at creating new investment behavior of the population .
What are the authorities doing to reform the tax system?
Proceeding from this, the development of the draft Tax Code (TC) in the new edition is justified by the need to create conditions for expanding investment and entrepreneurial activity in priority sectors of the economy and ensuring the implementation of strategic goals.
In this regard, the Tax Administration Development Program was previously established and adopted, the implementation of which is provided for in two stages: 2015-2019 and 2020-2025. Its goal is to help create a more efficient, transparent system focused on the provision of services, which will reduce administrative costs when collecting taxes, improve the quality of services for taxpayers, increase the level of voluntary compliance with tax rules and reduce the size of the shadow economy.
Within the framework of this program, the government pays special attention to the modernization of public services to entrepreneurs and the public, the introduction of online procedures, and the reduction of time and money spent on doing business.
In particular, a successful example of creating favorable conditions for taxpayers and the ease of use of electronic services to fulfill tax obligations was the launch of an online portal of electronic services for taxpayers, which is available on the official website of the Tax Committee. This is primarily aimed at simplifying tax administration, reducing the costs of taxpayers and significantly saving their time.
This portal provides[8] 36 types of electronic services for taxpayers, including the electronic procedure for submitting tax returns and reports, electronic invoices, online compensation of tax payments using national payment cards and plastic cards of the MASTER and VISA systems, online calculator and tax consultant.
In order to support and develop domestic production, the government decree of June 22, 2019 adopted the “Procedure for the release of imports of raw materials for processing and production of final products” and “List of raw materials produced in the country.” Also, from October 2019, the import of pedigree and beef cattle was exempted from customs duties and VAT.
Changes and additions were made to the “Taxation Rules for Individual Entrepreneurs” dated November 30, 2019 (No. 605) according to which individual entrepreneurs operating at home from January 1, 2020 undergo state registration for free with the tax authorities, receive a patent, and are exempt from tac payments. This allows artisans and other home-based entrepreneurs to determine their legal status and gain access to other broad opportunities for the development and expansion of their activities, for example, obtaining soft loans, grants and other types of support.
Also, as part of these changes, tax incentives are provided for women entrepreneurs during maternity leave.
In order to stimulate investment in the primary, secondary and vocational education and construction sectors, the government decree from July 19, 2019 extended the period from January 1, 2019 to December 31, 2023 for the application of reduced VAT rates of 5% for the education sector and 7% for the construction sectors.
Amendments were made to the Tax and Customs Codes in order to provide for tax benefits for the fisheries sector, which apply to poultry farming. On this basis, business entities of the fish farming, poultry and mixed feed industries for poultry and livestock are exempted from income taxes, VAT, road tax and real estate tax for a period of 6 years. Additionally, according to these changes, the import of equipment and means to meet the needs of these industries is exempted from VAT payment.
In order to reduce the tax burden on business entities, the 1% income tax rate was abolished by amending and supplementing the Tax Code by a government decree from January 2, 2020. According to the Doing Business report methodology, this will help reduce the overall tax burden by 17.68%, i.e. from 67.3% to 49, 62%.[9]
Based on the study of the experience of neighboring countries and trading partners, a Procedure for assessing the effectiveness of tax and customs benefits has been developed, which provides for the introduction of a modern mechanism for assessing the effectiveness of benefits and stimulating the development of priority sectors of the economy.
As a next step in simplifying the tax burden for business according to the documents being implemented,[10] as well as the Concept for the development of the draft Tax Code of the Republic of Tajikistan, the revised version today addresses the issue of reforming the social tax and eliminating the road tax to an optimum favorable level.
When considering the issue of reducing the tax burden, the new Tax Code provides for the reduction of social tax to 20% and the complete elimination of the road tax, which will reduce the general tax rate on a medium-sized manufacturing enterprise to 27.3% of commercial profit (according to the Doing Business report assessment methodology). This will ensure the competitiveness of the national economy at the regional level and will generally contribute to improving the investment climate.
The draft of the new Tax Code considered the proposals of businessmen
Today, the private sector is actively involved in the development of both the concept of the draft Tax Code in the new edition, and the draft Tax Code itself.[11]
Over 100 representatives of the sectors of agriculture and AIC, tourism, trade and services, energy and construction, ICT, finance and industry considered the main problems in the field of taxation that impede the conduct of investment and entrepreneurial activities in the country and presented their proposals for resolving them.
Along with this, the experience of trade and economic partners, including the CIS countries, as well as Georgia, Singapore, China, Malaysia and other countries on taxation was studied. Considering industry specifics and national interests, relevant proposals were developed for inclusion in the new edition of the Tax Code of the Republic of Tajikistan.
All submitted proposals were considered and most of them were taken into account when developing the concept and draft Tax Code as amended as part of the activities of the authorized Working Group, which includes representatives of ministries and departments, the private sector, independent national and international experts.[12]
According to the compiled Concept for the development of the draft Tax Code of the Republic of Tajikistan, the new edition will consider the requirements and norms of the digital economy so that taxpayers can pay taxes with a simple transaction that takes place automatically. Today, a growing business demand for expanding economic freedoms, for stable, predictable business rules, including the tax system, is obvious.
At the same time, the tax system will be focused on achieving the main goal, namely, stimulating business activity, economic growth and investment, creating competitive conditions for the development of enterprises. There is a need to streamline existing fiscal benefits, to make their purpose sectoral, and to abandon ineffective incentives.
Also, when developing the draft Tax Code, important attention will be paid to ensuring the sustainability of the norms and rates of tax legislation, since the total rate of taxes and contributions (% of profit) depends on them.
Also, tax administration provides for the construction of such a system that will ensure the process of flexible and efficient adaptation of the tax system to various scenarios of the National Development Strategy of the Republic of Tajikistan for the period until 2030. This approach is considered effective from the point of view of ensuring a balance between the state and economic entities, which will contribute to the creation of favorable conditions for the development of priority areas of business.
In practice, the aforementioned characteristics of the tax system should be manifested in relation to taxation conditions, tax rates, tax benefits and liability for tax offenses.
Modernization of tax accounting can be an important step in reforming the tax system, which requires the unification of tax accounting components with accounting components.
In terms of harmonization of tax legislation with other laws, as well as the activities of state bodies in one way or another related to taxation issues, and the exclusion of any possible discrepancies and duplication is provided.
Achieving these goals can ultimately create the prerequisites for ensuring the following results:
- a) optimization of the number of taxes having a similar tax base through their unification, reduction and simplification of tax reporting, minimization of operating expenses;
- b) simplification of tax legislation, elimination of contradictions and conflicts in regulatory legal acts in the field of tax relations, strengthening protection of the rights and legitimate interests of bona fide entrepreneurs and investors;
- c) improving the mechanisms for the exchange of information between state bodies and organizations, forms and methods of electronic administration of taxes and tax control, improving the quality of services of tax authorities.
To date, the new draft Tax Code is being approved by branch ministries and departments.
Starting July 1, it is planned to post the project on the information and legal Internet portal of the Ministry of Justice of the Republic of Tajikistan for public discussions in accordance with the requirements of the Law “On regulatory legal acts”.
By September, the project will be submitted to the government, and implementation is expected from January 1, 2021.
Very high expectation a placed on the new Tax Code. First of all, it is simplification of tax administration, reduction of tax burden on business, increase of tax collection by improving the quality of services, interaction between the parties and the gradual exit of the business from the shadows into the legal sector.
Surely, achieving the desired result in the face of an impending crisis will not be easy. At the same time, the positive results and the effect of the reforms also require increasing the potential of the private sector, in particular regarding the development of their ICT skills when introducing electronic tax return and electronic tax payment services, or even outsourcing tax accounting, following the example of developed countries, which will allow businesses to engage in their own development, expansion and development of new opportunities.
In this regard, civil society is required to cooperate in terms of timely raising awareness of ongoing reforms and willingness to use the proposed modernized services for online tax payment, electronic declaration, horizontal monitoring and raising knowledge about new rights and opportunities, as well as timely fulfillment of tax obligations.
This material has been prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project. The opinions expressed in the article do not reflect the position of the editorial board or donor.
[1] “Ease of Doing Business in Tajikistan”, World Bank website, https://www.doingbusiness.org/en/data/exploreeconomies/tajikistan#DB_tax
[2] McConnell K. R., Bru S. L. Economics : principles, problems and politics. – M .: Republic , 1992. – T. 1. – S. 358. – 399 p. – ISBN 5-250-01534-4 .
[3] Shadow Economies Around the World: What did we learn over the last 20 years?, IMF WP/18/17, January 2018, 76p.
[4] According to the data of the Single Window of the Agency for Statistics under the President of the Republic of Tajikistan as of 0101.2020.
[5] Overview of investment incentives in the Republic of Tajikistan. International Finance Corporation (IFC) for the State Committee on Investments and State Property Management of the Republic of Tajikistan. Dushanbe. 2018. 30 p
[6] World Bank. 2017. Global Investment Competitiveness Report 2017-2018: Prospects for Foreign Investors and Political Implications (in English). Washington, DC ..: World Bank Group.
[7] “Arthur Laffer: tax incentives for individual enterprises are ineffective”, “Sputnik Uzbekistan”
[8] “All Electronic Services”, website of the Tax Committee under the Government of Tajikistan, https://andoz.tj/Services?culture=en-RU
[9] “Ease of Doing Business in Tajikistan”, World Bank website, https://www.doingbusiness.org/en/data/exploreeconomies/tajikistan#DB_tax
[10] Clauses 6.2 and 6.3. The action plan of the Government of the Republic of Tajikistan to increase the country’s position in the Doing Business report for 2019-2022, No. 223 of May 2, 2019
[11] In order to implement the Decree of the President of the Republic of Tajikistan dated June 20, 2019, No. RP-I236, a Working Group was created at the State Committee for Investments and State Property Management from representatives of the private sector, business associations, investors, development partners and industry experts to develop the concept of the draft Tax Code in a new edition.
[12] Also, the new Interagency Working Group on the development of the draft Tax Code was created on July 12, 2019, No. 3 / 23-11 and operates under the Ministry of Finance of Tajikistan.
The group consists only of 25% of the employees of the financial and tax authorities and of 75% of representatives of line ministries, the private sector, scientific institutions and the public, protecting the interests of the private sector and investors