On October 20, 2008, Kyrgyz President Kurmanbek Bakiyev approved the Tax Code to become effective the following year. The new document was certainly a necessary and long-awaited piece of legislation. Businesses, social organizations and economists were said to have participated in the drafting, alongside public officials. Coupled with declarations of efforts aimed at placing the country within the top 50 of the World Bank’s list of countries in which to “Do Business”, the Tax Code is expected to radically simplify the running of businesses in Kyrgyzstan.

The resulting piece caused mixed reactions in society, with opponents of the legislative act being much more vocal in their criticism of the new regulations.

Officials and fiscal experts have been quick to highlight the “progressive” changes brought by the new version. One such change is a two-fold decrease in the number of taxes, from 16 to 8. Another is a significant cut in the value-added tax (from 20% to 12%), making it the lowest in Central Asia. A three-year tax break for companies processing local agricultural goods, a tax deduction for employee training expenses, and a system for simplified reporting and payment procedures, including electronic submission of tax reports, are also introduced.

Notwithstanding apparent gains, the document has a number of vital shortcomings very unwelcome in a business community struck by the financial crisis in their main export destinations – Russia and Kazakhstan. Among the biggest blunders are a return of formal bookkeeping and a steep increase in permit (“patent”) costs for the smallest businesses. Larger businesses in their turn are hit by the introduction of real estate and land taxes, while companies in the free economic zones are stripped off tax privileges.

The majority of the business community has responded negatively, connecting the new Code with higher taxes and complaining of the untimely nature of the changes. Higher taxes for local businesses might mean higher product prices and job cuts.

Most of the criticism of the new regulations comes from small enterprises. A number of business activities, which used to be managed within the so-called “patent” system, will now be excluded and patent costs for the remaining businesses will increase several times. Businesses run under the patent system were freed from bookkeeping and cash-registering and paid a single lump-sum tax instead of income and sales taxes.

The patent system was very successful with individual entrepreneurs who would gladly pay reasonable amounts for patents and run their businesses legally. On the other hand, they were also a way for bigger businesses to avoid paying “fair” taxes. For examples, all Bishkek casinos operated under the patent system, which means they had to pay “patent” taxes far incommensurable with the profits they were reaping. Since no bookkeeping was required under the patent system, officials did not know the real income of such businesses.

“Patenting” businesses also made it impossible to collect value-added taxes (VAT). VAT is one of the most burdensome taxes for Kyrgyz entrepreneurs. The government has set an annual income threshold of approximately US$100,000 for VAT payers – all firms receiving less than the threshold amount were VAT-exempt. Under the patent system, it was impossible to determine which firms had to pay VAT and this, according to official statement by the Government, caused considerable losses for the state budget.

While small businesses have been unambiguous in their attitude towards the Code, big companies haven’t stated their position clearly. A. Mokenov, Deputy Minister for Industry and Trade, declared that big businesses accept the new Code, while the Deputy Director of the Bishkek Free Economic Zone, B. Saliev, has criticized the new regulations for incompatibility with the concept of a free economic zone and for undermining the investment climate in the country.

The situation would certainly be less absurd if it were not for the widespread corruption in Kyrgyz public administration, including tax inspectorates, and a gross tendency of businesses towards working in the “shadow.” The risk is that most businesses might just go underground, concealing their incomes or the entire existence of their businesses. Another troublesome, but very probable scenario is that tax inspectors would come out gross beneficiaries of the change: with taxes increasing, so do their bribes, with money going into the pockets of unscrupulous inspectors and not into the treasury.

The executive so far has admitted that several articles of the Code are to be amended. On February 25 President Bakiyev ordered the Government to review the three most controversial innovations brought by the Code: property tax, sales tax and patent system. The earliest occasion for amending unsustainable articles would be the end of April. The President and the Prime Minister seem to agree that the document should be around for at least one quarter before any changes are discussed. Businesses, on their part, fear that the necessary momentum might be lost by then, and that current delays will lead to huge losses to firms and the “formal” economy.