The current situation
321. The level of tax receipts by the state budget in 2001 increased, reaching 12.4 percent of GDP against 11.7 percent in 2000. In spite of that, the total level of tax collection in the country remains insufficient
, although tax rates in Kyrgyzstan are low. The level of budget revenue does not provide for the financing of necessary public expenditure programs and the reduction of state debt.
322. At the same time, the tax system is far from favorable for the support of economic development. It is known that the tax burden is distributed unevenly among economic sectors and regions, as well as within them, thus creating a heavy burden on compliant taxpayers. Some economic enterprises practically pay no taxes, either because of legal exemptions or by hiding from taxes in “shadow business”, the scale of which is impossibly large. The development of market principles and improvement of efficiency of the country’s economy is impeded by the continuing practice of offsets among tax bodies and taxpayers, and by the payment of taxes, pensions and benefits in kind. Tax incentives for investment and export, which are a priority for economic development of the country, are practically absent. This is especially the case in relation to the largest tax, value added tax, that is theoretically the most appropriate form of tax for stimulating such activities. Unfortunately, due to numerous amendments
introduced to tax legislation in recent years, the logic of this tax has been distorted as, incidentally, have almost all other taxes and the Tax Code as a whole. The inability of the customs service to stop the flow of smuggled goods, many of which are subject to excise tax, hinders creation of equally competitive conditions in the economy and significantly reduces state revenues from a source with the greatest revenue potential.
The effectiveness of the tax and customs system is reduced significantly by the lack of adequate coordination and electronic information exchange among the departments dealing with collection of taxes and other state revenues, a bulky administrative system of these agencies, their non-transparency and existing corruption.
325. Aware of these problems, the Government and the Jogorku Kenesh recently initiated a number of reforms aimed at improvement of state revenue collection. In 2002, the Strategy of the Fiscal Reform in the Kyrgyz Republic until 2005 was adopted. The Concept of Improvement of the Customs Policy and a new draft of the Customs Code have been prepared. Actions have been undertaken to ease the situation of compliant taxpayers, to stimulate economic activities, to simplify taxation and simultaneously increase budget revenues, including those of local budgets, by eliminating unjustified tax exemptions and broadening of the tax base. These measures include:
· reduction of the income tax rate for legal entities from 30 to 20 percent, except for the subjects of natural and permitted monopolies, for which the tax rate of 30 percent has been preserved for 2002;
· reduction of the highest marginal income tax rate from 33 to 20 percent;
· increase of the minimum amount subject to income tax from 400 to 650 soms per month;
· annulment of excise tax on fermented tobacco;
· annulment of VAT exemption on imported fixed assets;
· introduction of excise tax on jet fuel and increase in the excise tax rate on jewelry;
· introduction of tax on interest payable to individuals at a rate of 10 percent and an increase in the tax rate on interest payable to legal entities from 5 to 10 percent;
· increase in the tax rate on rendering paid services to the population and retail sales from 3 to 4 percent;
· introduction of mandatory payment of patent-based taxes on certain types of activities, where tax administration is rather complicated due to prevailing circumstances;
· annulment of financial sanctions in case of non-payment, incomplete or untimely payment of taxes by economic entities as a result of untimely financing of works within the allocations envisaged for them by the budget for these purposes;
· permission to establish lending and leasing loss provisions for all financial and crediting establishments and to deduct them from the aggregate annual income; and
· introduction of a uniform tax for small businesses that replaces profits tax, sales tax, road tax, emergency tax for legal entities, and income tax and sales tax for individuals.
The integration currently under way of the Tax and Customs Inspectorates with a subdivision of the Social Fund in charge of contributions collection, into a single fiscal body responsible for ensuring budget receipts, will improve effectiveness and transparency of tax and customs administration. It is clear that these measures are not exhaustive for reforming the tax and customs system, and significant additional efforts and decisive actions will be required to improve the tax climate in the Republic.
Goals and priorities of tax policy
326. The Republic’s tax policy will be aimed at increasing state revenues necessary for effective provision of public services and for increasing the pace of economic development of the country. It is obvious that without increasing the tax collection rate, achievement of macroeconomic stability in the country cannot be expected, nor can public investments critically important for the economy be financed or the social sector be supported. At the same time, only a growing economy, in which the tax burden is evenly distributed among various economic agents, is it possible to generate sufficient budget revenues for such purposes. It is in principle important to achieve a level of tax receipts of 15 percent of GDP by 2005.
The priority directions of the policy to achieve this objective are broadening of the tax base, elimination of taxation inequalities and improvement of taxation and customs administration. The result of implementation of this policy should be significant improvement of the conditions for economic development, a decreased tax burden and reduction in a scale of the shadow economy. The attainment of these results will require significant amendments in both legislation, and operations of tax and customs bodies.
Improvement of tax and customs legislation
327. It is planned to implement the following reforms in the legislation aimed at broadening of the tax base:
· introduction of a tax on real estate;
· introduction of a tax on the use of mineral resources with a simultaneous annulment of deductions for restoring production and development of the mineral resource base;
· streamlining and broadening the list of types of activities subject to patent-based taxation, with a simultaneous improvement of the mechanism on determining the patent cost;
· cancellation of tax exemptions for certain economic entities, as well as sectors; and
· phased cancellation of certain existing exemptions for VAT.
In a medium term, it is planned to increase land tax rates and in future to move to determining the rate of this tax on the basis of market value of land. This would eliminate distortion in taxation and create equal economic conditions for all economic agents. With the same purposes in mind, the rate of insurance contributions for state social insurances payable by employers will be reduced and the rate payable by employees will be increased from 8 to 9 percent.
Reduction in administrative costs and reduction in the tax burden will be promoted by:
· full refunding of paid VAT directly from the budget to all taxpayers exporting and/or investing in enterprises, when the offset amount exceeds the tax liability;
· approximation of the allowed deductions against profit tax and income tax to the real expenditures of economic entities;
· annulment of ineffective local taxes and fees; and
· when it becomes possible in terms of budget capacities, phased annulment of cascade taxes – road tax and emergency tax.
Particular importance is attached to elimination of discrepancies and simplification of legal provisions regulating activities of tax and customs bodies. Improvements will be made to ensure that the Tax Code is the only legal document regulating taxation issues; all instructions and by-laws will be made compliant with the Code. It is intended to adopt and introduce a new Customs Code integrating provisions of the revised International Convention on Harmonization and Simplification of Customs Procedures (those of the Kyoto Convention).
Strengthening the administration for collection of state revenues
328. Reforming tax and customs administration, as well as collection of insurance contributions to the Social Fund, will be implemented by:
· establishing and strengthening the organization for collection of taxes and other government revenues;
· creating a uniform registration and information system unifying the Ministry of Justice, National Statistical Committee, Social Fund and the new revenue department, so as to improve the registration of taxpayers and establish uniform accounting for taxes and other mandatory payments;
· improving the authority of the tax services over observance of tax legislation;
· strengthening the sanctions for failure to use cash registers;
· giving documents reporting VAT the status of strictly accountable invoices and making them available only through tax bodies;
· strengthening the liability of employees of fiscal bodies for abuse of power or inadequate execution of their official authority; and
· ensuring a more complete coverage by the individual registration of persons subject to state social insurance, carrying out information and explanatory work among payers of insurance contributions and strict control over accrual and payment of insurance contributions.
329. Improvement of customs administration will be promoted by the development of customs infrastructure, including restructuring of the Directorate on Technical Development of Customs Infrastructure in Northern and Southern Zones merging them into a joint stock company of a closed type.