Public Outcry Delays Kyrgyz Tax Changes

Government forced to review large sections of new tax legislation.

Public Outcry Delays Kyrgyz Tax Changes

Government forced to review large sections of new tax legislation.

Sunday, 12 April, 2009
Following a vocal campaign against changes to the tax rules, the Kyrgyz government has been forced to backtrack on several legal provisions.

The government approved a new tax code in October and it officially came into effect in January.

Tax service officials said the idea was not just to increase net revenues, but to streamline the range of taxes in operation, make collection more efficient, and also encourage business development. They noted that the number of taxes had been cut from 16 to eight, that three types of sales tax had been replaced by one, and that value-added-tax had been reduced from a rate of 20 to 12 per cent.

However, from January 1, when the code became effective, the Kyrgyz president and government were inundated with letters and petitions from the business community and non-government organisations calling for a review of parts of the legislation.

Facing this kind of pressure, Prime Minister Igor Chudinov ordered a special commission to look into the tax code to see what needed to be changed.

The commission was set up at the end of January and its still working, with no clear end date in sight.

But the government already appears to have conceded several major points, including the right of small businesses to joint a fast-track taxation scheme.

One of the changes introduced in January reduced from 122 to 71 the list of business categories allowed to buy a certificate as proof of tax payment, rather than filing a full tax return. For those businesses still eligible, the fee for the certificate was raised several times over. Under a system launched in 1996, a range of companies could apply for a certificate or license, known as a “patent”, as proof that they had paid their taxes.

Tax officials justified the change by saying the licensing system had been abused by tax dodgers, but businesses questioned why a more bureaucratic system was being imposed on them just at a time when the economy was suffering the effects of the international financial crisis. They warned that it could bankrupt some firms and drive others into the black economy where they would pay no taxes at all.

On March 4, the government’s press service reported that the decision had been reversed and 124 types of business would be now allowed to take out tax “patents”. The fees for some types of business had already been reduced in February.

President Kurmanbek Bakiev has proposed a variable-rate license, payable on an annual basis and with its price depending on how the business concerned has performed over the previous year.

Raisa Sidorenko, a member of parliament from the governing party Ak Jol, was against the restrictions that have now been lifted, but argues that the fees need to be set at a realistic level so that businesses do not end up underpaying on tax.

“At the end of the day, we need to think about how the budget is funded,” she said. “That’s where the pensions, child benefits, and salaries for teachers and doctors come from.”

Another contested area where the authorities have taken a step backwards is property tax, which the new code introduced for the owners of homes and other kinds of real estate.

Apart from objections in principle, one of the problems was that there was little information about the property tax, so people were left struggling to understand who would have to pay, and how much.

“No one can figure it out,” complained Jumabek Saltiev, who chairs the housing committee in Bishkek’s Sverdlovsk district. “Tax officials talk about one way of calculating it when they’re on TV, but when you go and see tax service staff, they say something different.”

Nikolai Bailo, a member of parliament representing the Communist Party, says the property tax was conceived as a tax on wealth, which he says is a good thing as long as it draws the right distinctions.

“If a family received its two-bedroom apartment during Soviet times and they have a lot of children, they should not be charged,” he argued. “But if it s a young couple who have received a flat as a gift from their parents, then that’s a different matter.”

Sidorenko said she feared the property tax was so indiscriminate that it would hit farmers, in particular, since they tend to own several buildings.

“Property tax will have a negative impact on agricultural development,” she said. “The tax will apply to storage facilities, workshops, and [stationary] farm machinery, so it will hit everyone who works in the agrarian sector.”

A number of charities sent an open letter to President Bakiev asking to be exempted from property tax, otherwise they would not be able to operate.

President Bakiev has ordered a moratorium on this tax lasting until next year, while further discussions take place.

Although sales taxes have been reduced from three to one, objections to that were voiced as well, mainly on the grounds that transactions were already subject to VAT. The Kyrgyz president has asked the government to take another look at this issue, too.

Encouraged by these concessions and by the government’s willingness to talk, some in the business community are lobbying for the entire tax code to be put on ice until next year.

“All companies and enterprises are now feeling the impact of the global crisis to varying degrees, and they need to be supported,” said Bakay Junushev, director of iCAP Investment, a local consultancy firm. “Taking a step towards the business sector [by freezing implementation of the law] will demonstrate that the government has the resolve and ability to develop the country’ economy.”

Aydar Mambetov, head of the Association of Civil Society Support Centres, says all this trouble could have been avoided if the authorities had sought the views of the public consultation in the first place.

“If the law had been passed only after recommendations made during public hearings had been taken into account, there would have been no need to revise it now,” he said.

Despite the negative response, the tax authorities continue to exist that the new legislation is an improvement. It is, they say, based on fairness, transparency and the presumption of honesty, and it seeks to reduce the overall tax burden.

In a statement the tax service said, “It must be understood that any innovation takes time. Yet implementing the new tax code is an imperative.”

Asyl Osmonalieva is an IWPR-trained contributor in Bishkek.

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