On October 20, President Kurmanbek Bakiev signed a new Tax Code, which will come into force this January.  The government believes it will boost the economy by decreasing prices of domestic products, stifle corruption, and, importantly, pull national business out of the illegal market.  It decreases the tax burden on small-scale businesses at the expense of the financial service sector, commerce, and construction business.

“The government made big concessions regarding the tax code,” said Askar Shadiev, the Chair of the parliament’s committee on finance and budget, implying that the wide range of opinions among the parliamentarians forged the tax code. It has become more “equitable” with fewer taxes, but an increased tax burden.  It will give a certain package of tax exemptions to the vulnerable layers of population and tax privileges to produce industries, while heavily targeting the middle and large-scale business.

Taxes for small-scale businesses are slashed in half including the value added tax (VAT), which is decreased from 20 to 12 percent.  Also, some straightforward methods of administration are claimed to be implemented in order to prevent tax inspectors from coming face-to-face with taxpayers.  The latter can now submit tax declarations via the Internet and make payments within an extended timeframe.

A month ago, during the hot discussions, following the first reading of the tax draft in the parliament, representatives of 16 business associations addressed an open letter to President Kurmanbek Bakiev, Speaker of Parliament Aytibai Tagaev, and Prime Minister Igor Chudinov.  Noting the haste in adopting the draft, the chairman of the local union of banks, Anvar Abdraev, said that only symbolic points of suggestions of business representatives were considered. The changes would generally boost corruption in the tax inspection body and trigger a universal price rise, especially at a time of crippling inflation rates, which can lead to a social unrest, the business representatives argued.   

Being adopted for the first time, real property and sales taxes were the primary subjects of debate.  The former measure contradicts the constitution, which guaranteed private property rights.  It will target luxurious apartments, mansions, and lands held by corporations, while bypassing ordinary people with symbolic taxes.  Taxes on farmlands are increased by 30 percent, quite a disturbing trend when many farmers abandon their lands due to loss-making and crippling inflation partly caused by the food crisis. 

Unlike the current tax code, which requires a court decision on property matters, the new one makes the fiscal bodies the sole institution to decide on property of tax debtors, review complaints, and develop tax norms as well as instructions for itself.

Somewhat overstated by the government, the sales tax reform replaced a number of minor taxes, such as those levied on roads, service and retail sales.  Dinara Iskakova, the financial director of the local branch of the Coca-Cola Company, stressed the “cascade” nature of the sales tax.  She predicted a 25-40 percent price rise at the end of the downstream distribution of products, given the multiple stages of the business transactions, and, in her view, this will literally paralyze trade. In the long run, the business representatives argue, the reforms will increase prices for daily and manufactured products, and swell the interest rates for loans, offsetting the long-coveted decrease of VAT.  Moreover, they say, the decrease of the VAT from 20 to 12 percent will not boost business’s income since the inflation caused their products to rise already by 60 percent.

The tax code is not final.  In order to make it work, the government has to issue about 20 bills elaborating on its ambiguities and adjusting the new tax code to the legal framework, says the State Tax Agency.  Such contradictions will generate further complications, argue the business people.

Under the current tax code, only 20 percent of businesses pay taxes, mostly medium-sized and large enterprises, said Akylbek Japarov, the Minister of Economic Development and Trade.  There were attempts by the government to adopt a principle of 'single window' to facilitate business registration to attract investment to the country. However, small businesses consisting primarily of retailers, work on a license basis.  Pointing to retailers at Dordoi Bazaar, one of the largest markets in Central Asia of goods flowing from China, Adylbek Kasymaliev, the deputy chief of the State Tax Agency, said that this category of tax payers must be smoothly reduced with closer tax administration.

According to Kubanychbek Aidaraliev, the chief executive covering fiscal policy under the Ministry of Economic Development and Trade, it will not increase the burden on trade, but will increase the expenditures of the population by 2-3 percent.  How tightly it will push consumers who are already struggling with rising prices to the corner, will be shown by the inflation rate.  Yet, the government’s tax administration has always lacked effectiveness, which is likely to hide any immediate results of the new tax policy.