Institute for War and Peace Reporting | Giving Voice, Driving Change

Tax Changes Spark Controversy

The government seeks to increase its revenues by revising the tax code, including a new income tax.
By Amanullah Nasrat

Changes in tax laws designed to let the Afghan government pay a larger share of its internationally subsidised budget are drawing protests from business leaders who say higher taxes will stifle trade and thus economic growth.

The government relies heavily on foreign assistance to pay its bills. This year's core operating budget projects 678 million US dollars in expenditures. The international community and the Afghanistan government will raise about fifty per cent each.

To reach that target, authorities last month announced several changes in the tax code. They include a rationalisation of tariffs on imported goods raging from 2.5 per cent to 16 per cent of value. They also include new tariffs of four per cent on capital goods and eight per cent on petrol and diesel fuel.

While reducing corporate taxes from 25 to 20 per cent and lowering the business receipt tax from 2.5 to two per cent, the new regulations also introduced a five per cent tax on commission, interest and rent, and a service tax of 10 per cent for hotels, restaurants and air fares.

In addition, an income tax of 10 per cent was enacted for those making 250 to 2,000 US dollars a month, and a higher rate of 20 per cent on wages higher than that. “During 30 years of war, Afghans have neither paid taxes nor realised the importance of taxes," said Abdul Malik Rahmani, director of the revenue department at the finance ministry.

Khan Jan Alokozai, one of the nation's best known businessmen, was among the first to complain about the new tax rules. Alokozai said that following the fall of the Taleban, President Hamed Karzai had promised that traders would be exempt from taxes.

"Afghan traders are going to get together to present our protests to the president, and if he turns us down, we will have to sell the goods we've purchased," said Alokozai, who is also a leader in the local chamber of commerce. "Then we will stop trading into Afghanistan, and there will be a major economic crisis.”

“Since the new taxes were imposed, traders have halted thousands of containers of merchandise at customs and are unwilling to pay taxes,” said Alam Khan Hamdard, deputy director of the chambers of commerce. He called on the government to roll back the taxes and warned that companies might transfer their assets abroad.

The imposition of an income tax, on the other hand, sparked little protest, in part because the government offered no explanation on how it would collect the money. Finance ministry officials said that they did not expect to devise a tax-collection system before the end of the year, and that it would take even longer to implement the arrangements.

With an average income of about 700 dollars a year, few Afghans will be required to pay much, if any, income tax since the threshold is 3,000 dollars a year.

Government employees will mostly be exempt, and in any case many have not even been paid for five or six months, according to Ghulam Nabi Farahi, a deputy minister with the commerce ministry.

Most people seemed more concerned about the levy on imported goods than the income tax.

Mohammad Salem, 36, who has a government job, said his monthly pay of 36 dollars isn't enough to live on as things stand. “If taxes are raised, prices will rise too, and that will make government employees steal because they won't have a choice,” he said.

The government's operating budget is a fraction of the funds that are budgeted for reconstruction and development. The overall budget for 2005, including donor-funded projects, has been announced at 4.75 billion dollars, with 93 per cent of it to be funded from abroad.

Figures in this story have been corrected since it was first published.

Amanullah Nasrat is an IWPR staff writer in Kabul.