Interview given by Mr. Tapio Saavalainen, IMF MCD Mission Chief, to Ms. Larisa Lee, correspondent of MSN, on February 28, 2004 (Part 3, March 11, 2004 - Your Tax Inspectors Collect Taxes in the Wrong Way) 

Moya Stolitsa – Novosti

 

- All of the IMF outstanding credits and loans to our country totaled SDR 142.13 million or about US$ 200 million as of April 30 of the last year. For how many years have we accumulated so much debt?

 

- Since 1993.

 

- Interest might have accrued there.

 

- Don’t let them discompose you. Interest is cast at the most preferential rate – 0.5 percent annual.

 

- The next year will be the year of elections. How could the Ministry of Finance not concede to pressure that is bound to be placed on the budget?

 

- The Ministry should strictly implement the program.  Commitments assumed under the memorandum and signed by the prime minister say: the government will not issue any new resolutions on additional expenditure unless reserves are found through savings in other items.

 

- A new Tax Code is currently drafted.  In this connection, the issue of non-market taxes was raised again – emergency and road taxes. Businessmen and deputies of parliament are of the opinion that they bar further economic development. What does the IMF think on this point?

 

- These taxes should be removed immediately, but, after you find other ways of collecting revenue to compensate losses.  One of the objectives to revise the current code is to eliminate errors and contradictions in it.  For instance, some of the current taxes are not reflected in it. Additionally, the task is to simplify the code of laws, to increase its transparency.  I agree that the problem is to remove the taxes on production you’ve mentioned, for they have a distorting impact on the economy.  However, alternative sources of financing are required for this purpose.  I believe, this work should be done each year in the context of an exercise on budget formulation.

 

Down to date we’ve held discussions on how a working group should operate in updating the Tax Code. For instance, one of the paragraphs of the program says about a revision of the tax system for small businesses and small business and providing proposals by end-March.  If there are really such proved proposals, they could be taken into account during the Tax Code revision.

 

However when it comes to what would happen to such taxes, as the road and emergency taxes, it is worth to remember that they bring in the budget one and a half percent of GDP a year.  Therefore before making a decision on these taxes an analysis of basic fiscal policy directions for the next year is required. I believe that more than scheduled time should be spent on the work on the code. The task the commission faces is to submit the revised document for consideration by the public in mid-May. My opinion: is that this period is clearly short  because of a huge volume of work from just a technical point of view.

 

Ideally, the new Tax Code should be ready by when we start to discuss the draft budget for the next year. In that case, both the Law “On Budget” and the Tax Code could be submitted to parliament for discussion in one package.  Much will depend on developments in such taxes as VAT in agriculture and the property tax.  In good time, they will likely bring significant amounts in the budget, however, their revenue is insignificant as yet.

 

- In that case hasn’t the government started too early to introduce the property tax and VAT on large agricultural producers?

 

- Judging that resistance, maybe, you are right.  We knew that introduction of these taxes would be a large order, however, they are essential for the country in the long-term perspective.  I do not think that we would meet with less resistance if we start implementing them two years later.  Measures of this kind are always hedged with furious resistance, and the earlier they are taken, the better.

 

Mr. Anninat, IMF Deputy Managing Director, who came here about one year ago, shared his memoirs of how he, as Minister of Finance in Chile, became the father of VAT.  He told about those difficulties that he had to face when implementing a tax reform. But then, 20 years later, the Chileans came to a conclusion, that it had been the best reform implemented that time in the country.

 

As to Kyrgyzstan, I believe that is the question of misunderstanding of the VAT nature. For instance, a perfectly operating mechanism of its refunding is required for this tax to be effective.  The IMF TA mission will visit the republic soon to specifically deal with the VAT administration issues. It will analyze the situation not only with the VAT on agriculture, but in general as well. I personally have such an impression that your tax inspectors collect VAT not the way they should. For this reason, I do not exclude the fact that people do not understand the essence of the tax.  Bribery is still there in its collection, therefore, it is not surprising that the population is suspicious of VAT.  A new chairman of the Revenue Committee is now appointed. We hope, he will manage to succeed in addressing this issue.

 

- Mr. Saavalainen, do you know that after introduction of VAT, especially in the south - in the Jalal-Abad and Osh oblasts, many large farms were broken into small ones not to pay this tax?

 

- I am not sure that they were really broken down.  I think, the process has taken place only on paper for avoidance of a threshold of payment of VAT.  In reality, all these farms function the same way as earlier.  In this connection, I would like to note: a well performing tax inspection should perform tax collection functions instead of being an agency punishing for tax evasion as is the case today.  If the tax inspection explained agricultural producers the essence of the new tax, its advantages would have become clear either.

 

Some people consider VAT to be the too complicated tax, meanwhile the VAT collection system is effective in 123 countries of the world.  In some of these countries it is more successful, in others - less, but in any case it appears more effective than the alternative taxes. VAT is effective in many less developed countries.

 

I do not believe that the Kyrgyzs are not so smart as other people, it’s just the other way about.  The educational level in the republic is very high, much higher than in other countries.  So, much in this matter  depends on determination of the authorities.  If the country will want, the tax will work, if not - it will not work.

 

- In your opinion, how much could we collect as taxes in reality?  Today it is 14 percent of GDP.

 

- If to speak about the state budget, including the Social Fund, this figure reaches 18 percent.  For the recent two or three years the ratio of tax revenue to GDP increased by two-three percent.  In addition, if to compare this figure to parameters in other countries with similar per capita income, it is quite good.  However, if there is an increase in per capita income, the ratio of tax revenue to GDP will increase.  For, the more income, the higher taxes the person would pay.  There is also another part of this equation that shows the extent of the demand for public administration.  If the government renders services of poor quality, the population pays taxes quite reluctantly, if things are different, people pay taxes more scrupulously.

 

In the Scandinavian countries, for instance, the ratio of tax revenue to GDP is more than 50 percent.  However, at the same time, the population gets high-quality education and health services dependent on tax revenue. Certainly, many years will pass before Kyrgyzstan would reach such a level of income as in Scandinavia, however, my earnest conviction is that it is the issue of a social choice.  Each country makes its own decision, whether these or those public services the government should provide, or should this responsibility be shifted to a private sector?  Anyway, the population will have to pay for education, in one case – dependent on taxes, in other cases - from its own pocket to private companies.

 

- Let's talk about the shadow economy.  Deputy Prime Minister Joomart Otorbaev believes that save for shadow business tax revenue in the budget would be much higher, than we have now.

 

- The shadow economy exists everywhere.  Even in Scandinavia output of the shadow economy makes 10 percent.  In some countries this parameter is 40-50 percent. But I am not informed as to whether there is any connection between the shadow economy and taxation.  I guess Mr. Otorbaev meant that if to take into account profits of the shadow economy, solvency of the population with respect to taxes will be higher.  It is the same that I told either: with the increase in per capita income the ability to pay taxes increases as well.  However, talking which way the situation should develop is one thing, how it could develop is another thing.

 

We, certainly, could formulate our mid-term fiscal strategy based on an implication of full disappearance of the shadow economy and the relevant increase in tax revenue, but, you understand what consequences there could be, if these assumptions appear erroneous.  Tax revenue benchmarks are established in our program.  These targets in that case would appear not met, broken, that, in turn, could result in growth of the shadow economy.  Therefore, in fiscal policy-making we prefer to show some conventionalism, caution.

 

We believe that one could expect the increase in the ratio of tax revenue to GDP each year by half a percent, by 0.2 percent.  Our caution should not cause any additional problems.  In case of unexpected additional revenue, one could always adjust the program.  It’s better to be pleasantly, than unpleasantly surprised.

 

Therefore I would not like to do far-reaching forecasts.  I prefer a pragmatic approach reconsidering the forecast every year depending on the situation.  That is why when developing the fiscal strategy we would ask such ministries, as the health and education ministries, to make their own mid-term budgetary plans.  Certainly, when drawing up such documents, any department would request much more money from the budget, than the Ministry of Finance could allow.  Though, any country is compelled to deal with such debates.

 

- I am aware of certain conservatism of the IMF with respect to granting tax exemptions and holidays.  The Monetary Funds is for similar business conditions for both domestic and foreign businessmen.  The reduction in the excise taxes on gasoline and the reduction of the retail tax by two percent is currently lobbied.  What is your stand on this issue?

 

- We are now collecting facts.  However, we believe that rates of the excise tax in the country should correspond to the rates in the neighboring countries.  At the same time, certainly, we should not forget about receipts in the budget.  But harmonization in is necessary any case not to create negative incentives for transit of goods.  The issue of smuggling and numerous other loopholes in the system, which need to be liquidated, is connected to the issue of rates.

 

And may be, the whole objective of the tax reform is not just to clarify and determine the specific excise taxes, but to also remove these existing loopholes.  The reform that provides for the reduction of one tax and the increase in another would usually result in nothing.  Existence of free economic zones turned out to be one of such loopholes and the excise problem closely related to it.

 

- Recently President Askar Akaev severely criticized operation of some of the FEZs.  He told that either their treatment should be tightened, or they should be closed. The free economic zones in Karakol and Naryn became nurseries of smuggling.  But the matter is that all illegal goods therefrom go to the Chui oblast and Bishkek.  There, in these zones, the goods are just cleared.  The government for some reason shuts its eyes to this fact.

 

- It is, certainly, necessary that this question be settled.  We also agree with experts of Yegor Gajdar Institute who believe that free economic zones need to be liquidated.  They have already visited Bishkek several times to study the tax system in the country.  So this question remains on our agenda.

 

- Does this view concerns the Bishkek FEZ as well?

 

- I got an impression that more tight control is exercised over it.  On the other hand, we know how strongly the customs system is corrupt.  Therefore, I might assume that in the Bishkek free economic zone there is out of fix either, despite the availability of customs posts.  Full many we could and should do to improve customs administration.  In this question much depends on cooperation between the Kazakh and Kyrgyz customs houses.  If one party would exert control, while another would do nothing, there wouldn’t be the slightest use in doing such a work.  However, Mr. Malabekov told me about strengthening of cooperation with the Kazakh customs house.  We were also aware of the fact that consultations on this account were held during a recent meeting between Nazarbayev and Akayev, that they made the decision to address this problem.

 

- This was the last question, Mr. Saavalainen.  Thank you for answers and for the time you devoted to our newspaper.