Among the key steps in preparation for tax reform is simplification of tax reporting requirements and harmonization of tax and financial accounting reporting for selected taxes, which will reduce the administrative burden on business, says Alisher Gardonshoev, a graduate of the CABAR.Asia School of Analytics.
Tajikistan is working on modernizing its tax system as well as improving tax administration. This is an important part of the country’s development strategy, focused on increasing the population’s income and reducing poverty by 2030. Tax reform is of strategic importance as it should become an engine for private sector development, stimulate economic growth and improve the competitiveness of the national economy.
The implementation of tax reform in Tajikistan is supported by international organizations and financed through cooperation with the World Bank and other partners. These international institutions provide technical and financial assistance to make the necessary changes in the tax system and administration. The joint efforts of the Government of Tajikistan and international partners are intended to accelerate the tax reform process and ensure successful implementation of the necessary changes.
Complex challenges, among them low private sector development and the impact of the COVID-19 pandemic, underscore the importance of tax reform. The private sector currently accounts for only about a quarter of total investment and less than a third of industrial output, and its development is key to sustainable economic growth.
The main objective of tax reform is to create a friendlier and more efficient tax system that can attract investment, support business development and ensure sustainable budget financing. Striving to increase the contribution of the private sector to the economy and improving the business climate are key points in Tajikistan’s tax reform strategy.
Tax reform objectives:
Against the backdrop of rapid changes in the world economy and growing competition in the global market, Tajikistan is moving towards tax reform to achieve several important strategic objectives.
- Increasing incomes and reducing poverty: One of the main goals of tax reform in Tajikistan is to increase incomes and reduce poverty. The government aims to increase the population’s income 3.5 times by 2030. The tax system should become an effective tool for mobilizing domestic resources and ensuring financial sustainability.
- Stimulating private sector development: Tax reform is aimed at supporting private sector development. The private sector is considered an engine of economic growth and job creation. Simplification of the tax system and reduction of administrative barriers should make the business environment more friendly and help attract investment.
- Improving economic competitiveness: Tax reform also aims to improve the competitiveness of the national economy. Improving the business climate and reducing the tax burden on enterprises will allow Tajik companies to compete in the global market and expand exports.
- Sustainable budget financing: An important aspect of tax reform is to ensure sustainable budget financing. The COVID-19 pandemic has affected government revenues and increased the need for social spending. The tax system should become a reliable source of funds for financing government programs and projects.
- Ensuring social justice: Tax reform also focuses on ensuring social justice.
The objectives of tax reform in Tajikistan are closely linked to national priorities and the country’s development strategy. It is aimed at creating a more favorable environment for business, attracting investment and improving the quality of life of the population.
Problems and challenges of tax reform
In the process of preparation and implementation of tax reform in Tajikistan, there are a number of complex problems and challenges that need to be overcome to ensure successful and effective reform.
- Difficult economic situation: The difficult economic situation, exacerbated by the COVID-19 pandemic, is one of the key challenges to tax reform in Tajikistan. The pandemic has significantly reduced government revenues as it has had a negative impact on economic activity and the global market. This in turn has increased the need to finance social programs, health care and support the economy. This makes domestic revenues more important than ever and tax reform becomes a means of mobilizing additional funds for the budget.
- Lack of experience in tax reform: Tajikistan faces the challenge of lack of experience in tax reform. Despite the need to modernize the tax system, the country has limited experience in implementing such reforms. This is an important aspect, as effective tax reform requires careful design, adequate expertise and strategic planning. In this regard, Tajikistan can benefit from the assistance of international organizations and specialists to design and implement effective tax measures, as the lack of such experience may slow down the reform process and increase the risk of unintended consequences.
- Resistance from the business community: The main challenge related to the business community is possible resistance from entrepreneurs and companies. If a tax reform involves an increase in the tax burden, the business community may express concerns about its impact on their operations. Successful reform requires active engagement with business representatives, transparency on tax issues, and a belief that the reform will create conditions for an improved business environment that will ultimately benefit both the government and business.
- Administrative Challenges: Successful implementation of tax reform will require improvement of administrative procedures and possibly introduction of new technologies to automate tax procedures. Automation and modern information systems can improve the efficiency of tax revenue collection, but require financial and organizational resources. Administrative challenges may also include the need to train tax officials to work with new systems and procedures.
- Social justice: It is important to consider social justice in the reform process to ensure that new tax rules do not burden the poor or increase social inequality. Reform should seek to distribute the tax burden evenly and take into account the interests of the most vulnerable groups.
- Information and training: Informing and training taxpayers and tax officials about new rules and procedures is a key aspect of successful tax reform. This may require significant resources and the development of educational programs to ensure understanding and compliance with the new tax rules.
- International commitments: Tajikistan should also take into account its international commitments in the area of tax policy and international taxation. Reform should be harmonized with international standards and treaties to avoid conflicts and ensure compliance with international requirements and norms.
Despite these challenges, tax reform remains a priority for Tajikistan as it addresses important strategic objectives and contributes to the country’s sustainable economic growth and development.
Previous attempts at reform
Tax reform in Tajikistan is a continuation of processes that started back in the 1990s. Since then, the government of Tajikistan has taken a number of measures to improve the tax system and administration, cooperating with international partners such as the World Bank, International Monetary Fund, European Bank for Reconstruction and Development and others.
Some of the main stages of tax reform in Tajikistan include:
- Adoption of the first Tax Code in 1998, which replaced Soviet tax legislation and introduced new taxes such as value added tax (VAT), personal income tax (PIT) and corporate income tax (CIT).
- Establishment of the State Revenue Committee under the Government of the Republic of Tajikistan in 2002, which unified all tax and customs collection functions under a single administration
- Introduction of the Automated Tax Accounting and Control System (ATCS) in 2004, which automated the processes of tax registration, declaration, and payment, and increased the transparency of tax operations.
- Adoption of the second Tax Code in 2012, which simplified the tax system, reduced the number of taxes from 16 to 13, reduced some tax rates, broadened the tax base, and improved procedures for appealing and refunding overpaid taxes.
- Development of the Concept for the Development of the Taxation System of the Republic of Tajikistan until 2025 in 2017, which defined strategic goals and directions for further tax reform, such as improving the efficiency and quality of tax administration, reducing the administrative burden on business, increasing voluntary compliance with tax legislation and expanding dialog with taxpayers.
The current tax reform is a continuation of these efforts and is based on international practices in tax policy and tax revenue collection processes. This reform is a critical link in efforts to improve the efficiency of public spending, ensure fiscal sustainability, and support economic growth.
Preparing for tax reform
Preparing for tax reform in Tajikistan is a multifaceted process covering both legislative aspects and practical implementation of new tax provisions. First of all, it is embodied in the development of a new Tax Code, which has a significant impact on the country’s tax system. The Tax Code is under consideration by the government and envisages simplification of tax rates, broadening of the tax base, reduction of tax exemptions and strengthening of taxpayers’ liability. It is the main tool for improving the tax system and creating a more transparent and predictable environment for business.
In addition, successful reform requires the creation of a modern risk assessment methodology based on international experience. It involves taking into account various factors, such as the amount of income, history of tax compliance, type of activity and other characteristics of taxpayers. This will reduce the number of tax audits and make them more targeted and effective, which will reduce the burden on businesses and ensure a fairer tax system.
Preparations for reform also include the creation of mechanisms to improve the efficiency and transparency of tax expenditures. The introduction of cost-benefit analysis of tax incentives, as well as the creation of a unified registry of tax incentive recipients will make it possible to assess the impact of tax incentives on the budget and the economy, as well as to prevent abuse and corruption in this area.
Among the key steps in preparation for the reform are also simplification of tax reporting requirements and harmonization of tax and financial accounting reporting for selected taxes, such as personal income tax and unified social tax. This will reduce the administrative burden on businesses and prevent contradictions or inconsistencies in reporting.
Given the transition to modern technologies, an important element of preparations for the reform is the introduction of an automated VAT refund system, which will ensure timely and objective refund of overpaid VAT to exporters and other categories of taxpayers. This helps to improve the competitiveness of export-oriented enterprises and stimulates exports.
Finally, automation of selected services for taxpayers, such as electronic registration, electronic filing of returns, electronic payment of taxes, electronic receipt of notices and certificates, will simplify procedures for taxpayers and reduce the time and costs associated with tax duties. All these steps form an important part of the process of preparation for tax reform in Tajikistan, aimed at modernizing and improving the tax system in the country.
Tax burden in Tajikistan
Tax burden is one of the important factors affecting economic growth and development of the country. On the one hand, taxes are the main source of government revenues, which are used to finance public goods and social programs. On the other hand, taxes can reduce incentives for investment, savings, entrepreneurship and innovation if they are too high or inefficiently administered. Therefore, it is important to find an optimal balance between tax revenues and tax costs to ensure sustainable economic development.
Tajikistan has one of the highest tax burdens in the world, which can be explained by several reasons. First, Tajikistan is one of the poorest countries in the world, with low GDP per capita and high dependence on foreign donors. Therefore, the state needs to mobilize domestic resources to finance its development needs. Second, Tajikistan has a weak tax administration that faces problems of corruption, tax evasion, non-compliance with tax laws and low efficiency of tax collection.
Therefore, the government has to raise tax rates to compensate for losses from non-payment of taxes. Third, Tajikistan has an underdeveloped economy characterized by low diversification, high dependence on agriculture and labor migration, and underdevelopment of the private sector and infrastructure. Therefore, it is difficult for the government to broaden the tax base and stimulate economic activity.
Tax reform is one of the priority areas of Tajikistan’s development. Since 2022, a new Tax Code has been in force in the country, which was adopted to reduce the tax burden, simplify the tax regime, increase transparency and accountability of tax authorities, strengthen the fight against tax evasion and improve the competitiveness of the economy.
For example, the income tax rate for resident individuals is reduced from 13% to 12% and for non-residents from 25% to 20%. The income tax rate for legal entities varies from 13% to 20%, depending on the industry. The VAT rate is reduced from 18% to 15% for non-cash transactions, while excise taxes are increased for cell phone services and natural resource extraction. According to the Paying Taxes 2019 study, Tajikistan’s overall tax rate is 67.3%, which is the share of taxes and contributions in corporate profits. This is one of the highest rates in the world, which indicates a high tax burden on business in Tajikistan.
Prospects for Tax Reform in Tajikistan:
Against the background of outlined changes and improvements in Tajikistan’s tax system, the prospects for tax reform represent an important part of the country’s strategy for achieving the goals of sustainable development and economic growth. Despite a number of complexities and challenges, it is expected that the reform can bring significant benefits to the country and its economy. Let us take a look at the main prospects that may arise from a successful reform.
- Increasing tax revenues and financial sustainability: Increasing tax revenues is one of the key perspectives of tax reform in Tajikistan. The country faces challenges related to limited financial resources and dependence on external sources of financing. Tax reform aimed at more efficient tax collection will allow the government to mobilize domestic revenues to finance government programs and projects. This can improve the country’s financial sustainability, reduce dependence on external borrowing, and ensure sustainable development.
- Improving the investment climate: Improving the investment climate is important for attracting investment and private sector development. Tax system reform can help create a more favorable environment for entrepreneurs and investors. This includes lowering tax barriers, simplifying procedures, reducing bureaucracy, and making tax policy predictable. Improving the investment climate can lead to an inflow of new investments, create new jobs and stimulate economic growth.
- Support for social programs: Increasing tax revenues through tax reform can provide additional resources to finance social programs. This is important for improving the quality of life of Tajikistan’s population. Additional funds can be directed to the development of health care, education and social protection. Supporting social programs can reduce inequality and promote a more equal distribution of wealth in society.
- Promoting international commitments: International standards and commitments in the field of tax policy play an important role in today’s global economic community. Tajikistan, as a participant in the world market and international organizations, must comply with international tax standards. Reform of the tax system can contribute to compliance with international obligations, which will facilitate the country’s interaction with the world community, as well as promote economic integration.
- Support private sector development: Private sector development is considered an engine of economic growth and job creation. Tax reform to reduce the burden of taxes and bureaucracy can make the business environment more attractive to entrepreneurs. Supporting private sector development helps to diversify the economy and reduce dependence on the public sector.
- Developing tax consciousness: One of the objectives of tax reform is to develop tax consciousness. Transparency in the tax system and education about taxes can help taxpayers better understand their responsibilities and rights. This can help increase voluntary compliance with tax laws, reduce the informal economy, and build trust between citizens and the state.
Overall, tax reform in Tajikistan focuses on multiple perspectives, including financial sustainability, economic growth, social welfare, international cooperation, private sector and tax consciousness. These perspectives together push the country towards achieving sustainable development and poverty reduction, making tax reform a key component of Tajikistan’s strategy towards prosperity.
However, despite these prospects, the implementation of tax reform remains a challenge. The success of this initiative depends on successful coordination and cooperation between the government, the business community, and taxpayers. Continuous monitoring and evaluation of the reform is also necessary to adjust plans and ensure their effectiveness in the long term.
In conclusion, tax reform is an integral part of a country’s strategy towards sustainable development. This reform reflects the desire to create a favorable business environment, stimulate investment and ensure financial stability. Given the complex challenges and prospects associated with tax reform, the cooperation of all stakeholders remains a key factor in achieving success in this important process.