Afghan businesses feel constrained by government tax campaign

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KABUL (Reuters) – A new tax regime aimed at weaning Afghanistan off international aid has boosted government revenues, but has sparked complaints from some private companies that it is hitting them unfairly, dampening hopes of an economic recovery after decades of war.

Afghans build a house on top of a hill overlooking Kabul, Afghanistan, January 1, 2017. REUTERS / Mohammad Ismail

The Afghan Ministry of Finance said it plans to generate nearly $ 2.5 billion in revenue by March 2017, $ 500 million more than the target, a significant achievement as the money for the aid and the foreign armed forces are starting to slow down.

The increase in a country plagued by corruption and tax evasion is due to better tax collection rather than a stronger economy, however, and companies say they are the target of overzealous officials whose time and cost requirements prevent them from investing in future expansion.

With Islamist insurgents controlling vast swathes of land and calling on young men to join their ranks, job creation is crucial to Afghanistan’s battle against militancy.

“Their only concern is to increase a certain amount of income. It’s not their concern how it’s done, ”said Mustafa Sadiq, whose Omaid Bahar Fruit Processing company typically employs around 200 people and doubles that number during peak hours.

“They don’t increase the volume of business, they just increase taxes on whatever is left.”

Under rules introduced in late 2015, the main corporate income tax rate has been doubled from two to four percent, and businesses are now required to pay four times a year.

While the absolute levels are not high by international standards, compliance places a heavy burden on an industry where many were used to paying no taxes.

Businesses, many of whom learned of the new rules months after they went into effect, complain about arbitrary and authoritarian tax inspectors and say the system is slow, inefficient and open to abuse, with some officials demanding bribes for quick customs clearance.

Already struggling to compete with cheap imports from neighbors Iran and Pakistan, they say the tax campaign is suffocating the private sector, which saw a 30% drop in new business registrations in the first half of 2016.

Bahar makes juice from apples, grapes and pomegranates, pillars of the horticultural sector that the government considers a development priority.

Instead of developing, Sadiq says he spends much of his time arguing with inspectors or doing paperwork.

“Personally, I had planned to start two or three small manufacturing companies, but I decided no,” he said. “I have never been so disappointed in the past 30 years.”

INCREASE REVENUES

Economic development in Afghanistan rarely makes the headlines, which are dominated by the ongoing conflict.

Much of the $ 20 billion economy, whose main products, apart from opium, are fruits and rugs, operates informally, without paying taxes. While the government needs the revenue, it must try to avoid crushing private enterprise.

“If the government is under pressure, so is the private sector,” said Fawad Saafi, whose Millifactories group manufactures products ranging from PVC tubes to foam mattresses.

Its workforce has fallen from 700 to less than 200 as economic growth stagnates and business dries up.

Saafi’s problems point to a dilemma for the government in Kabul. International donors recently pledged $ 15.2 billion until 2020, but after that the future is unclear and there is little appetite for unlimited support.

The government has increased airline overflight fees and imposed a 10% tax on cell phone recharges, but mineral wealth is a distant dream and efforts to introduce VAT on consumption have failed.

At the same time, growth is not expected to exceed 2% for 2016, well below the rate of population growth.

Although companies complain, the finance ministry claims some success in increasing domestic revenue and exceeding donor targets.

“Taxes are not everyone’s favorite, especially those who have to pay, and that’s why you see resentment,” said Khalid Payenda, director general of macro-fiscal policy at the ministry.

He says the government is aware of the risk of overtaxing part of the economy and expresses sympathy for the bureaucracy that businesses face.

“But if you look at him from a government perspective, I think he has done a very good job of getting the budget situation back to normal.”

President Ashraf Ghani brought Afghanistan into the World Trade Organization and launched infrastructure projects such as energy and rail networks to strengthen regional ties and trade.

But after decades of war, Afghanistan is ranked 183rd out of 190 countries in the World Bank’s Doing Business Index, and the tax campaign has not made it any easier.

“Large formal companies complain that the most responsible and visible companies share a disproportionate tax burden on businesses,” the report notes.

It is not clear whether incomes, boosted in 2015 by currency fluctuations and tax arrears, will continue to rise.

“The feeling among many businessmen is that if some bureaucrats walk past a successful business, they will find a way to make money out of it,” said Franz-Michael Mellbin, EU Special Representative in Afghanistan. .

“It creates a really hostile business environment and it doesn’t have to be. “

($ 1 = 66.5500 afghanis)

Additional reporting by Mirwais Harooni; Editing by Mike Collett-White


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