Afghan Taxes Squeezing Poorest

As the Afghan government prides itself on boosting budget revenues, it has been accused of using methods that hurt people on modest incomes while letting large businesses off some or all their taxes.

In an interview for IWPR, finance ministry spokesman Aziz Shams said domestic revenues reached 1.8 billion US dollars in the last fiscal year, which runs from March to March. That represents a 25 per cent increase on the previous year’s figure of 1.4 billion dollars, although it would be less with inflation taken into account.

Shams said around 50 per cent of government revenues came from customs duties and other import-related levies.

The Afghan government operates two fiscal accounts known as the operating and development budgets. While the latter is funded almost entirely by international donors, the operating budget – for wages and running costs – comes partly from domestic revenues. (See Afghan Government Has Cash, Won't Spend for more on the development budget.)

Last year, domestic revenue was equivalent to 59 per cent of the operating budget, while this year it is forecast at a similar 62 per cent. The Afghan government is under pressure to increase this proportion so as to reduce its reliance on donor funding.

An IMF statement in February, noted that “tax collection has been growing at about 32 per cent per year, a commendable achievement for almost two years of impressive gains”, while noting that the government should be “pressing ahead with revenue reforms to ensure continued sizable increases in tax collection in coming years”.

The finance ministry’s draft budget statement for the current year said the planned revenue increase would come from macroeconomic policies designed to growth and thus the tax base, more efficient collection, rising customs receipts thanks to increased demand for imports, efforts to identify non-paying businesses, and in the long run, the development of mineral extracting industries. (See Oiling Wheels in Afghanistan on the latter.)

Critics of the system say more efficient but indiscriminate taxation of goods means the final price is passed onto consumers – very often the poorest sections of society in one of the world’s most impoverished nations.

“Prices at the market increase on a daily basis. When I ask the shopkeepers about it, they say it’s because taxes have gone up,” manual labourer Ezatullah said.

Ezatullah earns about eight US dollar weeks by hiring himself out as a day labourer on Kabul’s Hajji Yaqub Square. He manages to get work about three days in every seven.

“Why in God’s name are they trying to collect taxes out of our pockets?" Ezatullah asked. “It is shameful for the government to be announcing that its revenues have gone up."

Public sector employee Gol Ahmad expressed cynicism about the tax system.

“The increase in revenues is indeed a matter of pride for government officials, because they collect them from the pockets of the poor and put them in their own pockets. Why shouldn’t they be happy?" he asked.

Ibrahim Zarif, a trader, confirmed that he and his colleagues passed on all costs including tax hikes to the customer.

"When we import something, we include all the costs such as transport, taxes, illegal extortion by the police and bribes into the prices, and then we add on our percentage profit,” he said. "It’s the public that has to pay for all our costs and profits."

Khan Jan Alokozay, deputy chairman of Afghanistan’s Chamber of Commerce and Industry, blamed a policy of raising import taxes on everything from cars to essentials like blankets, rice, cooking oil and sugar.

"When taxes go up, traders have to increase retail prices. This is a problem which ordinary people are having to deal with at a time when many can’t afford the bare essentials because of unemployment and low incomes," Alokozay said.

He cited an increase on the duty payable on flour last year – later lowered when it resulted in retail prices more than doubling – as an example of a misconceived attempt to boost local production.

"The government didn’t make accurate calculations on this. It thought it could increase the price of locally-produced wheat by increasing taxes on wheat flour imports, but it hadn’t reckoned with the fact that Afghanistan doesn’t produce enough wheat to be self-sufficient, so it has to import it from abroad."

The opening up of the Afghan economy after the Taleban government was ousted in 2001 resulted in a flood of imports rather than the growth of local production. Businesses preferred the quick returns of trade over investment, and the government refrained from intervening in the belief that markets would regulate themselves. Afghanistan’s exports remain limited to a few items – handmade carpets, karakul lambskins and dried fruit and nuts.

Masud, an economics lecturer at Kabul University, says that in a weak economic environment, the government should apply import charges more selectively, so as not to hit consumers who end up paying for higher tax rates.

"The government was unaware which domestic products were adequate to meet the demands, so that it could have increased import duties only on those items,” he said. “It should also have developed sectors and created sustainable sources of revenue."

Masud’s views were echoed by Shukria Paikan, sits on the Afghan parliament’s committee for economic affairs. She wants to see import duties applied selectively to curb the influx of only those items the country cannot produce enough of.

"Finance ministry officials will be summoned to the parliamentary committee for economic affairs in the near future [to discuss] this matter, so that better ways of increasing government revenues can be identified," she said.

Economist Saifuddin Saihun says building a tax structure based on indirect taxation is not the answer because it merely punishes ordinary people through retail prices. Instead, he says, the government should be trying to actively promote local production to stimulate growth and broaden the tax base. He also believes the government should be moving to sign contracts with major foreign companies to exploit Afghanistan’s untapped mineral wealth.

The debate on the effects of import levies is taking place amid concerns that the effects of taxation are unfairly distributed, as wealthy businesses can get away with not paying.

Rohullah Ahmadzai, director of investment promotion with the Afghanistan Investment Support Agency, AISA, says nearly 24,000 companies have not been paying their taxes.

"Based on a proposal from AISA, these companies are to be partially exempted from taxes they owe for past years. This decision has been made to encourage them to continue investing in the country in future," he said.

People like Ezatullah believe firms are often allowed to default on taxes not because they are in financial difficulties but because their owners have powerful connections.

"They should go and collect taxes from those who own dozens of shops, markets and towns,” the labourer said. “They aren’t powerful enough to tackle such individuals - one of whom might be a minister, another a vice-president, and another a [militia] commander or a governor.”

Finance ministry spokesman Shams confirmed that non-paying firms would receive partial exemptions and a further chance to clear what they owe.

Asked about claims that the current tax structure was iniquitous, Shams said only that "imported items on which higher duty has been imposed are being reviewed, and the results will be announced at a later date".

Khan Mohammad Daneshju is an IWPR-trained reporter in Kabul.