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




Kyrgyzstan Review, 10 years ago




3. QUANTITATIVE ESTIMATES OF LOSSES OF BUDGETARY TAX REVENUES

The above mentioned problems existing in the Tax Law and tax administration, led to significant short-received amounts to the government budget of Kyrgyzstan. The reason for the budget losses is first of all, legal (by use of shortcomings and contradictions in the legislation) and illegal (due to existence in the shadow economy) evasion of taxpayers from payment of taxes. Another reason for the losses are limited growth rates of production and, accordingly, limitation of the tax base due to the tax regime, which is unfavorable for many enterprises. This Chapter provides quantitative estimates of the budget losses in conditions of the current Tax Law.
 
Assessment of the budget losses was performed on the basis of a methodology, which implies comparison of the actual tax payments with potential tax receipts, which could have taken place provided taxpayers and tax administration would have exactly and entirely implemented the Tax Law. Hence, the provided assessment does not take into account losses, connected with imperfection of the Tax Law itself. Nevertheless, the scope of the losses assessed in this way serves as an indicator of efficiency of the Tax Law and the tax system as a whole.
 
To make an assessment of a potential tax base, the production data published by the National Statistics Committee of the Kyrgyz Republic were used. The NSC methods make it possible to take into account the shadow economic activity, thus permitting to get an adequate (though, probably, understated) assessment of a potential tax base. Subsequently current tax rates were applied to this base, which resulted in an assessment of potential tax payments. The budget losses were determined as the difference between potential tax liabilities and actual tax payments[10].
 
As the level of administration considerably depends on the type of tax, assessments of the budget losses were carried out in regard to each of the main taxes. The algorithm of assessments was performed in the form of models and detailed in Appendix 2. Given below is a description of the main approaches to construction of models as well as results of calculations made on the basis of the models.
 
Specific models have been constructed for the following taxes: 1) VAT, 2) personal income tax and deductions to the Social Fund (consolidated model), 3) profits tax, 4) excise taxes. These models have been based on statistical and tax data for the period of 2000-2002. It had to be taken into account that during the considered period the Tax Law was being intensively changed.
 
VAT. In the model of this tax, taxation of imports and domestic production is considered separately. With regards to imports, its taxable portion is calculated as the difference between the total value of imports and exempt import supplies. The tax base of VAT on domestic production was determined on the basis of the data of the national accounts and the input-output tables. It was estimated as the value of the gross output of the branches[11] not exempt from VAT minus the cost of exports taxed at zero rate and intermediate consumption of the branch products, on which credit of VAT paid is possible in principle.
 
Personal income tax and deductions to the Social Fund. In view of the fact that a progressive scale of rates is applied to income tax, estimation of tax liabilities requires information of taxpayers distribution in accordance with the amount of the taxed income. Statistical data of the amount of wages in economy (on the basis of the national accounts) and money incomes of the population subject to income taxation were used as a starting point in assessments of the tax base. Non-taxed incomes or incomes, on which income tax is paid in the form of compulsory patenting, were subsequently excluded from the base. The number of different categories of taxpayers and the amount of allowed deductions were determined on the basis of the data of employment and demographic structure of the population. Then the average taxable amount was calculated. The information on inequality in income distribution was obtained on the basis of the published Gini coefficient.
 
Profits tax. Assessment of the tax base was also obtained on the basis of the national accounts by subtraction of profits received in the branches exempt from this tax from the total indicator of profits in economy (net operational surplus).
 
Excise taxes. In view of variety of excisable goods and frequent change in rates, it is rather difficult to perform a correct assessment of tax liabilities on the basis of economic data. It is due to this fact that another approach was used in regard of this tax, the one based on a particularly sizable evasion, which takes place on this type of tax, and the role of administration rather than rates influencing the amount of receipts. The amount of excise taxes (in % to GDP) actually collected for the recent years was determined. Deviation from this amount downward was considered as losses incurred by the budget due to deteriorated administration.
 
The results of calculations performed on the basis of these models for 2001 are given in Table 3.
 
 
 
Actual collections
Potential tax liabilities
Budget losses
Million soms
Million soms
Million soms
In % to GDP
VAT
4221
8859
4638
6.3
Personal income tax
947
5523
4579
6.2
Deductions to the Social Fund
3256
12056
8800
11.9
Profits tax
966
5318
4352
5.9
Excise taxes
1103
1918
815
1.1
Source: Calculations of the authors
 
Thus, according to the provided calculations, losses on only these five main types of government revenues amount to 31.4% of GDP, while the actually received total budget revenues amounted to 17 % of GDP in 2001.


[10] It should be taken into account that these methods imply inclusion of the registered tax arrears into the budget losses.
[11] The value of the gross output is, of course, different from the value of VAT taxed supplies. The main difference is that the gross output includes production for own consumption and unsold produce. However, production for own consumption is mainly typical for agriculture, which is exempt from VAT, and the value of unsold produce, though significant in absolute terms, constitutes but a small share of the gross output (about 1%) in economy as a whole and does not change the degree of accuracy in the provided calculations.