: / Analytics / The Tax System of the Kyrgyz Republic (2003)

Kyrgyzstan Review, 10 years ago

5.1. Poland

Despite a comparable size of tax rates, the Polish fiscal bodies collect almost three times more taxes in regard to GDP, than their Kyrgyz colleagues. This significant difference can partly be explained by solely historical and geographical factors duration of functioning of the Government and its bodies (including financial and treasury bodies) formed by the democratic society, by belonging to the European cultural circle, by the process of integration into the European Union. Some differences result from differences in the Polish structure of economy, in which the share of agriculture and small-scale trade are considerably smaller. However, the six times difference in personal income tax (PIT) collection can hardly be explained by the cultural factors and the difference in the structure of incomes of the population.
The most important experience of the Polish fiscal system is a self-mobilizing mechanism of tax payment. It is based on a close connection between payment of certain taxes and getting some benefits from the government budget. In Poland free health care depends on health insurance payments within the framework of income tax and social insurance contributions. A person who evades from payment of these taxes is not entitled to free medical treatment. In Poland each person who makes health insurance payments is registered with the regional or branch health care office. Each of these offices has a definite budget and, in accordance with this budget, it gives a guarantee to the insured person for this or that volume of free services to be provided by health care institutions (hospitals, clinics, medical practices), connected with health care offices on a contract basis. A patient registered with one of the health care offices, may get free medical aid in only those medical institutions, which have signed a contract on repayment of expenses connected with medical treatment, with his health care office. Observance of the registration principle is so strict, that sometimes results in significant costs (once a hospital refused to provide medical aid to a patient brought by an ambulance, the refusal having led to his death), but this makes well in favor of taxpayers discipline.
If social insurance in Kyrgyzstan were laid under the obligation of exercising control over social insurance payments alongside with income tax payment to be made at the health care institutions, taxpayers would have been enforced to make regular contributions. Besides, mechanisms of refinancing expenses connected with medical treatment provided by a medical institution to the registered patients, should have been introduced in the budget. This would have mobilized these institutions for exercising a more accurate control of whether or not a patient is liable to free medical treatment.
The second mechanism of tax self-control is a connection between the amounts of a pension and contributions paid to the Pension Fund. Since January 1, 1999 a pension reform came in force in Poland, which is applied to the persons born after December 31, 1948. According to the old system, a regular contribution in the amount of 45% of gross salary (income tax inclusive) was transferred to the government budget and was subsequently taken into account through the system of settlements for assessment of a pension.
According to the new system, 24% of gross salary is placed on an individual account in the Pension Fund, which is managed by a private firm, and is directly transferred to the amount of the future pension. 21% of gross salary replenishes the budget and serves for financing pensions calculated according to the old system and a minimal pension guaranteed by the government according to the new system. The minimal pension paid from the budget must insure a social minimum of a pensioner in case of unsuccessful investments of the private firms managing pension contributions. Its amount, however, is in proportion to the amount of contributions made by a pensioner to the Social Fund.
As one can see from the said, dependence between the amount of contributions transferred by a working person, and the amount of his future pension had existed in Poland before the pension system reform was implemented. The implemented reform has made this connection still stronger. Working persons, taking a great interest in checking the government of their pension account, started exercising the total control through Internet and by phone of regular and timely transfer of contributions by an employer to the personal account of a working person in the Pension Fund.
The next factor indicating the difference between the Polish tax system and the Kyrgyz one is an important role of an annual taxpayer income declaration. Each year by the end of April personal income declarations must be submitted to the treasury bodies. To ease administration on declarations, each taxpayer was issued an identification tax number. After filing a declaration by a taxpayer, the Tax Department checks authenticity of each declaration, followed by a routine control with regard to a number of taxpayers. All purchasers of cars and real estate are subject to compulsory inspection, the information of these persons being obtained from the car registration bodies and purchase and sale of real estate bodies. Such control limits, for example, the possibility of buying houses through dummies, which are incapable of documenting the source of income during the inspection.
In order to increase budget revenues of the Kyrgyz Republic, it is necessary to successively extend the circle of persons, who must file an annual income declaration, and on the basis of these declarations carry on regular inspections of the persons, whose declared income does not correspond to the information of their expenses.
It should be stressed, that introduction of the system of compulsory filing of the tax declaration was implemented in Poland with great difficulties. Annual settlements with fiscal bodies were popularized by granting various tax preferences connected with construction, repairs, education, health care, etc., which allowed deduction of the funds from the tax base, which were spent for repairs or purchase of an apartment, expenses connected with education or health care of taxpayers or their children, thus considerably reducing income tax liabilities. Such policy made it possible for the government to channel significant funds to financing of specific branches and spheres of economy.
Introduction in Kyrgyzstan of deductions of health care and education expenses confirmed by documents from the taxable income is supposed to promote popularization of income declaration. It would have improved control of incomes of health care and educational institutions and increased activity of the society in the spheres, where activity of the government is not sufficient. A significant role in popularization of submitting income declarations in Poland belongs to mass media, which propagated education in the society, thus having caused the need of knowledge of the population, which would have permitted to decrease the tax burden within the framework of the existing Law. The role of mass media in control of honesty and decency of the senior government officials and politicians should also be mentioned. According to the Polish legislation, besides an income declaration the above mentioned persons must file a property declaration accessible for the public. This makes it possible for electorate to compare official incomes of officials with incomes received by them and property accumulated, which undoubtedly considerably strengthens the tax system and restricts corruption.
Finalizing analysis of the Polish experience, we would like to stress the importance of the real wages in collection and administration of taxes. Kyrgyzstan may serve an example for analysis of the negative influence produced by wage freeze in the budget sphere, which resulted in disconnection of the work performed and remuneration. Even in the years of the gravest devaluation of wages in Poland, remuneration of employees in the budget sphere highly provided for the social minimum level being a strong impetus in conditions of high level of unemployment, which produced a positive effect on discipline of employees. In Kyrgyzstan wages of employees in the budget sphere have stopped performing this function. A working place is valued, where it permits getting additional incomes (a psychological factor is sure to be positive as well having work rather than being unemployed). Thus, distortions in utilizing a working place with the aim of getting additional and often illegal incomes became a daily reality in the life of the Republic. In the most extreme cases it is necessary to pay for obtaining a working place giving additional incomes. The status of the main mobilizing factor for employees should be attributed to official wages. This will improve the quality of functioning of the tax sphere and administration. A limited government budget hampers immediate adjustment aimed at increase of wages, but indisputable real growth in wages in the budget sphere in the coming years must become one of the elements of the public administration reform.
One more effect is produced by connection between real wages and tax receipts. Freeze of real wages in the budget sphere turns into decline of real incomes of its employees, thus causing real decrease of income tax receipts and contributions to the Social Insurance Fund. Additional decrease of budget revenues takes place due to influence of the wage level in the budget sphere on the general wage level in the economy.