In Kyrgyzstan, mechanisms for corruption between SMEs and the government are perhaps most prevalent in the clothing industry, and most notably in the manufacture and export of clothing. It is cheaper for small factories to work in the shadow economy, than to follow the rules and pay taxes. Even if SME business owners understand the need for taxation, most citizens don’t understand what their tax money pays for since pensions are not paid, teachers earn a meager salary, and public budget figures are kept secret. Another incentive for staying in the shadow economy is to avoid the complex tax regime. Complying with the tax code is such a brainbusting exercise that businesspeople have to hire expensive tax consultants in order to navigate their tax payments. In the end it is cheaper and easier to work in the shadows than to pay taxes.
Despite a range of complicated tax compliance issues, one system is uncomplicated, efficiently collects taxes, and minimizes potential for corruption. This is the license fee system, by which bazaar traders pay a one time tax each day that they enter the bazaar to sell goods. If an inspector comes by, they simply show a receipt that they paid their taxes for the day, and the inspector moves along. However, the government is now seriously talking about discarding this system, indicating that they may favor a cash register system, which is almost impossible to implement.
Anders Aslund, presidential advisor under the Akayev regime, previously recommended keeping the license fee system. The Chamber of Tax Consultants (CTC) also favors keeping the license fee system, noting that it is the only tax system that seems to work in Kyrgyzstan. This group predicts that traders will rebel against a cash register system, which would increase contact with inspectors, thereby enhancing mechanisms for corruption. Furthermore, such interaction is frightening and unpleasant for rural traders that are not used to dealing with the government. A cash register system would only serve as another way to rob the poor, stoking public anger in a country that is already unstable.
CTC recommends keeping the license fee system, citing that developed country governments recognize that a license fee is an efficient way to collect taxes with high cash flow businesses, such as taxis and street vendors. Meanwhile, the Ministry of Finance argues that big time traders are working in the bazaar and paying miniscule taxes by the license fee system. Somehow they ignore the fact that these traders could and should be paying their taxes through the customs regime at the border.
CTC also recommends that the value added tax (VAT) be reduced from 22% to 15%, citing that last year income taxes were reduced from 20% to 10%, but collections doubled. Meanwhile, the current VAT is hard to collect and generates corruption. According to CTC, the government of Kyrgyzstan loses about one third of its potential revenue each year to corruption because it is cost effective for citizens to pay bribes rather than high taxes. The VAT could be lowered, making it easier to collect, thereby increasing government revenue.
CIPE partner, the Bishkek Business Club, is currently working in a coalition with CTC to raise public awareness about the changes the government is proposing to the tax code. This coalition has generated recommendations for the new tax code. Although the Ministry of Finance has not welcomed public input into the draft tax code, there are members of parliament that are willing to listen to the business community. This is a chance for us to watch and see if the government is really interested in public participation, and if they really are interested in doing something about corruption affecting the daily lives of small and medium sized business owners. Kyrgyzstan is a poor country where entrepreneurs feel the government squeezing the life out of them either through high taxes or corruption. Stabilizing the country depends on providing cost incentives for citizens to do business and support themselves through free and transparent markets. As we’ve seen in places like Chile, creating a free market may be one of our best avenues to a society free from authoritarian government structure.
Published Date: December 05, 2006