A new tax regime aimed at weaning Afghanistan off international aid has boosted government revenues but drawn complaints from some private businesses that it hits them unfairly, dampening hopes of economic recovery after decades of war. Afghanistan’s finance ministry says it expects to raise almost $2.5 billion in revenues in the year to March, 2017, $500 million above target, an important achievement as cash for aid and foreign armed forces begins to slow.
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The increase in a country plagued by corruption and tax evasion is down to better tax collection rather than a stronger economy, though, and firms say they are being targeted by over-zealous officials whose demands on time and money are preventing them from investing in expansion for the future. With Islamist insurgents controlling large swathes of territory and appealing to young men to join their ranks, creating jobs is crucial to Afghanistan’s battle against militancy.
“Their only concern is raising a certain amount of revenue. How it’s done is of no concern to them,” said Mustafa Sadiq, whose firm Omaid Bahar Fruit Processing usually employs around 200 staff and double that number at peak times. “They’re not increasing the volume of business, they’re just increasing taxes on whatever there is left.”
Under rules introduced at the end of 2015, the main business receipts tax rate was doubled from two to four percent and companies must now pay four times a year. Although absolute levels are not high by international standards, compliance imposes a heavy burden for a sector where many had been used to paying no tax at all. Businesses, many of which learned of the new rules months after they became law, complain of arbitrary and overbearing tax inspectors and say the system is slow, inefficient and open to abuse with some officials demanding bribes for quick clearance.
Already struggling to compete with cheap imports from neighbours Iran and Pakistan, they say the tax drive is stifling the private sector, which saw a 30 percent decline in new business registrations during the first half of 2016. Bahar makes juices from apples, grapes and pomegranates, mainstays of the horticultural sector that the government sees as a top development priority. Instead of expanding, Sadiq says he spends much of his time wrangling with inspectors or doing paperwork.
“I personally planned to start two or three small manufacturing businesses but I decided no,” he said. “I haven’t been as disappointed at any time in the past 30 years.”
Economic development in Afghanistan rarely draws the headlines, which are dominated by the ongoing conflict. Much of the $20 billion economy, whose main products, aside from opium, are fruit and carpets, operates informally, paying no taxes. While the government needs revenues, it must try to avoid squashing private enterprise. “If the government is under pressure, then so is the private sector,” said Fawad Saafi, whose Millifactories group makes products ranging from PVC tubes to foam mattresses.
His workforce has dropped from 700 to under 200 as economic growth stalls and business dries up.
Saafi’s problems point to a dilemma for the government in Kabul. International donors recently pledged $15.2 billion to 2020, but after that, the future is unclear and there is little appetite for open-ended support. The government has raised airline overflight fees and slapped a 10 percent levy on mobile phone top-ups, but mining riches are a distant dream and efforts to introduce VAT on consumption failed.
Meanwhile, growth is expected to come in at no more than 2 percent for 2016, well below the rate of population growth. Although companies complain, the finance ministry claims some success in increasing domestic revenue and beating targets set by donors. “Taxes are nobody’s favourite, especially those who have to pay and that’s why you see resentment,” said Khalid Payenda, director-general for macro fiscal policy at the ministry.
He says the government is aware of the risk of overtaxing one section of the economy, and expresses some sympathy for the bureaucracy companies face. “But if you look at it from the perspective of the government, I think they did a very good job of bringing the fiscal picture back to normality.” President Ashraf Ghani has taken Afghanistan into the World Trade Organization and launched infrastructure projects like energy and rail networks to strengthen regional links and trade.
But after decades of war, Afghanistan is ranked 183 out of 190 countries in the World Bank’s Doing Business index and the tax drive has not made it easier. “Large formal companies complain that the more responsible and visible companies share disproportionate corporate burden of taxes,” the report noted. It is unclear whether revenues, boosted in 2015 by currency fluctuations and back taxes, will continue to rise.
“The feeling amongst many business people is that if some bureaucrats drive past a successful business they’ll find a way to extract money from it,” said Franz-Michael Mellbin, EU Special Representative to Afghanistan. “That makes for a really hostile business environment and it doesn’t need to be.”
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