: / Central Asia and CIS

Kyrgyzstan Review, 10 years ago

[28.05.24] Lease financing needs tax exemptions in Kyrgyzstan

In 2000 the International Finance Corporation (IFC), a member of the World Bank Group, launched a project to introduce lease financing in Central Asia. Then foreign experts were very optimistic about the prospects opened to Kyrgyz business people by the introduction of lease financing. Today, however, experts of the IFC leasing development project, local parliament members, bankers, and business people (potential leasing recipients) agree that Kyrgyzstan is now far behind its regional neighbors (Kazakhstan and Uzbekistan) in terms of lease financing development.
Kyrgyzstan behind its neighbors 
Why, with equal start-up conditions for leasing development, is Kyrgyzstan behind its neighbors? The recent roundtable meeting, organized by the Kyrgyz government and the IFC leasing development project for Central Asia, discussed obstacles to developing this financial instrument in Kyrgyzstan.
"Life has showed that it's difficult and expensive to get lease financing in Kyrgyzstan," said Fatima Eshimbekova, director of the IFC leasing development project in Kyrgyzstan. "There are many obstacles. We have passed the law on lease financing and made relevant amendments to the Tax Code, but that is insufficient. Taxation is what hampers the development of lease financing here."
IFC launched the lease-financing project in Central Asia as a mechanism to support private enterprise in the region. Four years ago Kyrgyz business people rushed to the project office to obtain more information concerning lease financing, but were much disappointed after talking to project consultants. Practically no potential recipients of lease financing were satisfied with the leasing conditions.
Law amendments needed 
Kyrgyz Deputy Prime Minister Joomart Otorbayev spoke of the necessity for hasty harmonization of legislative acts. Amendments are needed not only to the Kyrgyz Tax Code but also to other laws.
Last year Kyrgyzstan saw 165 lease-financing contracts totaling US $800,000, which is too little. However, the establishment of three leasing companies in Naryn, Talas, and Batken shows the existing interest in this financial instrument, despite the existing obstacles. In Otorbayev's words, these obstacles are the loss of equipment acquired through lease financing in case of the non-fulfillment of one's contractual obligations, double taxation, and the non-competitiveness of lease financing.
The IFC established a US $40 million fund for developing lease financing in Central Asia, and Kyrgyzstan can benefit from this fund if the country has more favorable conditions for this kind of financing.
Leasing on the rise in Kazakhstan 
According to Amangeldy Omarov, director of the IFC lease financing project in Kazakhstan, since 2000, when the country passed the lease financing law and introduced relevant tax exemptions, the interest in lease financing has been on the rise in Kazakhstan. Today acquiring equipment through lease financing is 15% cheaper than through bank loans. Last year the volume of lease financing in Kazakhstan rose by three times since 2002.
Kazakhstan's largest leasing company belongs to the state, and almost all of the other 20 leasing companies have been established by Kazakh commercial banks. The lease-financing portfolio of the Almaty Trade and Financial Bank amounts to US $18 million. According to experts, this year Kazakhstan's lease financing market could reach US $200 million.
Introducing tax exemptions for lease financing, the Kazakh government understood the inevitability of the related budget losses. Indeed, tax collection was reduced by US $11 million, but the state budget later received US $22 million due to the production sector's growth owed to lease financing.
Kazakh bankers are interested in the Kyrgyz market. Today three Kazakh banks work in Kyrgyzstan. Now they offer crediting services, but the next stage is lease financing.
Tax administration inefficient 
Some Kyrgyz parliament members do not think taxes are the main problem facing lease financing. In particular, Temir Sariyev thinks the problem is the inefficient tax administration, not the absence of tax exemptions. In his words, a long list of machinery and equipment whose import to Kyrgyzstan has been exempted from VAT. Sariyev tried to explain why lease financing is developing too slowly in Kyrgyzstan: the neighboring countries have preserved large-scale industrial production and half of their leasing companies are state-owned. In Uzbekistan everything belongs to the state, and leasing operations are not risky there because they enjoy the state guarantee.
Kyrgyzstan has almost no large industrial production, and production equipment is only needed for small and medium businesses. That is why buying equipment through lease financing is not very popular. Kyrgyz banks lack financial resources and are more interested in crediting than in lease financing (annual interest rates for hard currency credits are 20%-25% and for credits in Kyrgyz soms 30%-40%). In Kazakhstan the average annual interest on bank credits is 14%.
VAT for imported equipment 
The chief of the IFC project developing lease financing in Central Asia thinks the main obstacle to lease financing in Kyrgyzstan is the VAT for imported equipment. He also admitted that today it would be better for private business people in Kyrgyzstan to buy equipment through bank credits, not leasing. So he suggested to all concerned organizations and individuals to make proposals on the taxation of lease financing right now, while a new Tax Code is under preparation. In any case, the IFC will continue the project.
The Kyrgyz Finance Ministry does not want to grant any serious tax exemptions to leasing operations for fear of losing budget revenues. Kazakhstan's experience, however, shows that a loss in tax collection would be compensated for by an increase in production. In Kyrgyzstan, tax exemptions for lease financing would lead to an insignificant decrease in tax revenues, but would allow small and medium businesses to acquire new equipment and increase production.
Experts think the Kyrgyz government must equalize the Kyrgyz tax law with the tax legislation of the neighboring countries. Of eight possible tax exemptions for lease financing, Kyrgyzstan has two, Kazakhstan seven, and Uzbekistan five.
By Larisa Lee,
The Times of Central Asia, May 28, 2004

More on the issue: