University of Central Asia
Graduate School of Development
Institute of Public Policy and Administration
Certificate in Policy Analysis
(What is the Appropriate Value Added Tax (VAT) Rate inAfghanistan?)
Mohammad Aqeel Tahery
Kabul 2015
Table of Content
1. Introduction …………………………………………………………………………………...1
2. Problem description ………………………………………………..…………………………3
2.1Problem statement...………………………………………………………………………3
2.2 Symptoms of the Problem………………………………………………………………..3
2.3Scope of the problem...……………………………………………………………...…….3
2.4External factors...……………………………………………………………………….....4
2.5Stake holders…………………………………………..……………………………….….4
2.6 Problem Evaluation need………………………..………………………………….…….5
3. Policy Alternatives……………….……………………...…………………………………….6
4. Recommendation……………………………………………………………………………....8
5. Evaluation ……………………………………………………………………………………..9
5. Limitations…………………………………………………………………………………....10
6. Conclusion……………………………………………………………………………………10
Abstract:
Economic instability of Afghanistan and its reliability on foreign aids caused the
government decide to seek new revenue sources, one of them application of VAT in the
country which subsequently issues of its different aspects raised; VAT rate as most
significant ones which caused that government post pond VAT application twice for two
years to find the most appropriate VAT rate combination (including zero rate and
exemptions) that could be acceptable to all stake holders. This paper is intended to
provide general background and recommendation for VAT rate in Afghanistan that
could be acceptable to all stakeholders, first section describes the main features and
aspects of VAT rate issue, section II focuses on alternatives for current VAT rate in
context of three options (Option 1: Reducing Standard VAT rate Option 2: Increasing
standard VAT rate Option 3: Multi VAT rate system), section III recommends Multi VAT
rates system option for the issue of VAT rate, section IV summarizes the main
conclusions and evaluation of the alternative.
1. Introduction:
The economy of Afghanistan has improved significantly since 2002
due to the infusion of multi-billion US dollars in international
assistance and investments, as well as remittances from experts.
It is also due to dramatic improvements in agricultural
production. However, Afghanistan still remains poor for now and
highly dependent on foreign aid.
Afghan government must consider ways to raise their revenue by
consider new sources of revenue to solve revenue and expenses gap
in national budget, in addition, it is a significant and growing
problem across Afghanistan that undermines security, development,
state and democracy-building.
Considering the economic and trading situation of Afghanistan
along security issues which caused that government seek new
revenue sources to increase national annual revenues, government
has intended to apply VAT as a tax revenue and as one of the main
conditions of IMF for supporting Afghanistan, so issues raised
along the process of implementation that the main one can be
considered that: what can be an appropriate combination of VAT
rates in economic context of Afghanistan?
Value added tax as a source of tax revenue for government and the
main effects of its rate on national budget and businesses in
Afghanistan along effect of VAT rate on specific goods and
services elasticity and cross border trades, need public and
businesses support on VAT rate which is going to be implemented
in Afghanistan so there must be a rate which can be accept able
for public and be profitable for government.
Middle Asian and south Asian countries neighbor to Afghanistan
all has applied VAT, considering it as a main source of revenue
(e.g. India) by different VAT rate relative to their economic
situation and the combination of global spread of VAT and the
rapid globalization of economic activity which has resulted in an
interaction between VAT systems, along with increasing VAT rate
have raised the profile of VAT as a significant issue in cross
border trades as a great source of revenue for countries which
shows the importance of VAT implementation in low revenue
countries like Afghanistan.
There is no agreed framework for application of VAT in cross
border trade in the region so the absence of such framework has
increased the uncertainty and complexity of VAT application in
Afghanistan, raising several issues including appropriate VAT
rate combination for goods and services.
An overview of obstacles and opportunities ahead of VAT
application and decision for the right VAT combination rate along
exemptions and public and businesses feedback to it as affected
ones will be helpful for Ministry of Finance as the government
body for its application and controller in Afghanistan which has
been in struggle of application of VAT in past recent years.
2. Problem description:
2.1 Problem statement: VAT is a direct revenue source to
government like an indirect tax to people that on each
transaction of goods and services VAT is charged and passed to
buyer that at last the consumer will pay so its rate will have
significant impact on people. VAT rate one of the main issues
that caused VAT application being post pond has raised tensions
between the stakeholders about the most appropriate rates that
can be applied which has both support and incentive of the public
and for the businesses in the country along being congruent
enough with the regional VAT rates.
2.2 Symptoms of the Problem: Lack of reliable information
regarding public trends and high corruption in government that
caused unreliability of public from government and unstable
trading system in Afghanistan were the main obstacles against
choosing an appropriate VAT rate Combination.
2.3 Scope of the Problem: Middle Asian and south Asian
countries neighbor to Afghanistan all has applied VAT,
considering it as a main source of revenue (e.g. India) by
different VAT rate relative to their economic situation and the
combination of global spread of VAT and the rapid globalization
of economic activity which has resulted in an interaction between
VAT systems. As VAT is going to be applied on businesses that
have more than 200 million Afghani year turnover the 500
businesses which VAT is going to apply on will have less burden
except more paper works and the public as the main payers of
taxes which is being determined by VAT rate and Ministry of
Finance as its applier and controller will be involved in
struggling with the issue. So an appropriate VAT rate in matrix
of mentioned perspectives of the issue is needed to be chosen.
2.4 External factors: Along economic situation of
Afghanistan which is highly unstable and relied on foreign aids
and unfair political competitions of neighboring countries which
always want Afghanistan as a weak country beside them and
regional trading systems, all had their effects on VAT rate in
Afghanistan.
Pre mentioned factors have been used as leverage from outside
over weakness of government for choosing an appropriate VAT rate
in the country so their negative effects were somehow
supplemented of current issue.
2.5 Stakeholders: People of Afghanistan as the one of burden
suffering groups on this issue like other people of the world are
not interested in having new tax along other ones that are paying
and for sure their feedbacks by its nature will have great impact
on application of VAT chosen rate by government as the main
stakeholder.
Businesses that are the main economic chains of the country are
the ones who have to manage the prices in market that they can
survive their businesses, sell their goods and services along
doing the challenging paper works so regarding their number and
amount of money they do work with will not be interested in
having all mentioned problems ahead of their businesses when
there be an absence of appropriate VAT rate.
Ministry of Finance as the planner and controller of VAT rate in
one aspects will generate more revenue for government by choosing
high rate but in other aspect gaining public support and keeping
businesses on their track along balancing trading attractiveness
of country for businesses will have lots to do and the power to
positive and negative influence on the issue.
Media and government survey publications along meetings with
regional public representatives and business associations for
having their opinions and level of acceptance of the issue will
be good ways of involving all stakeholders.
2.6 Problem Evaluation need: Regional integration is now
forcing countries to harmonize their taxation system in order to
avoid competitive distortions across countries. This means that,
without special measures, goods will be taxed twice if they are
exported from one country that does have different VAT rate to
another country or has sales tax instead. Vice versa, goods that
are imported from a VAT-free country into another country with
VAT will result in no sales tax and only a fraction of the usual
VAT. There are also significant differences in taxation for goods
that are being imported / exported between countries with
different rate of VAT.
Table 1: Middle and South Asian countries VAT rate
Region Countries VAT Standard Rate
Iran 6%
Tajikistan 18%
Uzbekistan 20%
Kyrgyzstan 10%
Pakistan 17%
India 12.5-16%
Afghanistan 2% - 10%
VAT rate must be designed, Implemented and evaluated in continues
form and before application to ensure that all process of
application of VAT rate assigned to each goods and services are
in proper way with no contradiction with regional and domestic
trade the area which it’s going to be applied on to apply in a
fair and even-handed way to ensure there is no unfair competitive
advantage afforded to domestic or foreign businesses that may
otherwise distort international trade and limit consumer choices
and buying ability.
3. Policy alternatives:
Taking all aspects of the issue into consideration the following
are four options for the issue of appropriateness of the VAT
rate:
Option 1: Reducing Standard VAT rate
Option 2: Increasing standard VAT rate
Option 3: Multi VAT rates system
Afghan Government by Considering the economic situation of
Afghanistan which is highly unstable and mostly depended to
foreign aids specially in security sectors and the need of
development projects for tackling the fiscal problems that
Afghans are facing, has chosen multiple revenue generating
sources and systems to be developed, implemented and used that
VAT was the second chosen one.
As Afghan government policies have sat VAT as one of revenue
sources to fill the gap of losing foreign aids in national
budget, government revenues from this tax system must be proper
to be relied on, so as much the VAT rate are high government
revenues will be more at the customs also in domestic
transactions.
Increasing VAT rate from its current 8 % rate politically and
economically will be a solution to part of current fiscal crisis
in Afghanistan as government revenues will increase along that
and from jurisdictional perspective since there is high VAT rate
in region will make less impact to regional trade and businesses
with Afghanistan and in other hand higher VAT rate than 8 % will
make Afghanistan VAT rate closer to balanced VAT rate in the
region which makes easier feasibility and more efficient
application of VAT rate but Experience has shown that when a VAT
rate is increased, some retailers use this Opportunity to further
increase prices above Budget day increase, which would add to the
effect On inflation. The higher VAT rate makes the VAT
politically unacceptable and will put upward pressure on
inflation.
Reducing VAT standard rate which is 8% for now can be considered
as an incentives for more private sector and foreign investments
when there is less tax over there transactions and imports
specially when there is high VAT tax rate in neighboring
countries also the real burden suffering group which is the
public will show less resistance to the tax implementation which
is a huge privilege to government, its impact over trade and
regional businesses will be there however.
Reducing VAT rate will provide more flexibility for businesses
and public over there decisions with lower taxes which a more
efficient VAT rate therefore could reduce the VAT finally paid by
the citizens.
Using multiple VAT rate for transactions and imports is one of
the most time burdening and hard works in VAT from perspective of
its administrative feasibility and jurisdictional case which is a
big problem for Afghan government at the current situation and
needs expertise that could assign different rate for different
goods properly but when there is multiple rate for different
goods and services from one side it will keep peoples buying
ability high for inelastic goods and services and from other side
it will be revenue generating engine for government, at the same
time less disincentives will be made for businesses and
transactions; Multiple VAT rate will bring equity of tax paying
for different public levels.
4. Recommendation:
Each option above had implications for the implementation, cost,
effectiveness, political, economic and jurisdiction perspective
so based on detailed analysis of above options it is recommended
that Ministry of Finance consider the third option, Multiple VAT
rate System.
Although the VAT may become a “money machine,” as usually
acclaimed, but only if it is coherent in rate structuring and
broad-based. The practical advice is that the VAT rate structure
be designed as coherent as possible, preferably with multiple
standard rates, few exemptions, and zero rating being exclusively
granted to exports. Broadening base, in general sense, reduces
deadweight loss and provides an opportunity for lowering the rate
for inelastic goods and thereby, increasing compliance, from a
theoretical point of view there is no presumption that a single
VAT rate will minimize economic distortions, multiple rate may,
however, offer a greater opportunity to fit the VAT to various
social and political ends (Gillis, 1990: 12). If so designed, the
VAT is effective and efficient.
All registered businesses are obligated by law to issue VAT
invoices when conducting transactions with other VAT registered
businesses. When conducting business with unregistered
businesses and the final consumer, sellers are obligated to issue
a sales receipt showing the cost of the item and the amount of
VAT paid by the unregistered person.
Invoice based VAT rate show the price of buying and selling so
need high level of record keeping and accounting and severe
administrative capacity when there is more than one rate; the
problem is already solved for ministry of finance by national tax
controlling, monitoring and administer database.
Multiple rate structure is inherently complex, but yet it is
argue able for it on both efficiency and equity grounds. The
rule specifies that to overcome the issue the followings are
recommendations to Ministry of Finance:
Tax rate on a good should be set inversely proportional to
the good’s own demand elasticity.
It implies that the rate should be differentiated across
different groups of goods and services of various demand
elasticity. Lower rate must be applied to the goods and
services consumed primarily by the poor.
The possibility of VAT differentiation for different goods
and services has been raised.
The intention is to influence consumer demand for goods
which represents negative or positive effects in production,
by using high and low VAT rate, respectively.
Lower VAT rate on labor intensive services have also been
suggested as a means to promote employment.
5. Evaluation:
The evaluation purpose is to apply a practical, implementable and
comprehensive VAT rates combination in the country to achieve the
desired outcome after implementation of the recommendations so
based on ministry vision to have reliable, creditable and public
supported VAT rate, evaluation framework involves all
stakeholders and legislative authorities that could gain their
support and be politically and financially acceptable.
The costs for the evaluation will be determined according the
procurement sources and the selected approaches but estimably it
will be around 100000 AF for the process.
6. Limitations:
Budgetary: There will be less budgetary limits for
implementation of the recommended VAT rate due Ministry of
Finance as VAT applier and controller has a coherent system which
is used for all taxes in Afghanistan including databases for
registration, invoices printing and creation and tax collection
that can be considered as a pre provided base for VAT rate.
Time: Thinking of fiscal crisis and foreign aids reduction
along transition phase that Afghanistan is passing through
applying the recommended VAT rate is essential as soon as
possible for overcoming the low revenue issue as part.
Resources: As ministry of Finance already has the mentioned
coherent revenue system there will be no limits for equipment but
in case of qualified personnel there will be needs of experts in
the field however of experienced taxing staff.
7. Conclusion:
Considering economic situation of afghan people along that the
fiscal crisis which government is struggling with, two different
scope which effects the VAT rate in Afghanistan which shows that
VAT rate must be as low as possible to lower the pressure over
the public with low economic level and at the same time be used
as a source of revenue for government so the rate which can be
fit to both circumstances, along considering interests of
stakeholders has to gain the public trust who have to burden the
tax rate.
Reducing and increasing current VAT rate will only fulfill one
aspect of the issue, the government needs or public desire of low
taxes and interests of multiple stakeholders along different VAT
rates of regional countries over trading goods with Afghanistan
will not be all considered with mentioned alternatives of current
VAT rate.
Multiple VAT rates over goods and services creditably
differentiated according to their elasticity for people and
ongoing trading situation of country can be the best option for
addressing all perspectives of the issue.
Afghan government along all budgetary and resources limitations
and the shortage of time to over comes the issue must have a
well-planned, budgeted and realistic evaluation process prior
considering implementation of the changes in the VAT rate when
applying recommended multi rate VAT.
References:
Afghanistan Revenue Department (VAT Overview Booklets)
Afghanistan Revenue Department (VAT Brochures)
Andrew M C Smith, Ainul Islam & M. Moniruzzaman(2011) “
Consumption Taxes In Developing Countries” Victoria University Of Wellington.
Working Paper No. 82
Bird, R.M & Gendron, P-P (2006) “Is VAT Best Way To Impose
General Consumption Tax In Developing Countries?” International
Studies Program, Working Paper 06-17
Bird, R.M & Gendron, P-P (2010) “What Do (And Don’t) We Know
About the Value Added Tax?” Challenges from Globalization Ii
OECD (2014) “International VAT/GST Guidelines” Global Forum on VAT
OECD (2014) “Consumption Tax Trends 2014” OECS Publishing.
Http://Dx.Doi.Org/10.1787/Ctt-2014-En
Richard M. Bird (2005) “Value-Added Taxes in Developing and
Transitional Countries: Lessons and Questions” International Tax Program
Sternlieb, S (2014) “Inadequate Revenue Threatens Afghanistan’s
Stability” International Journal of Security & Development.
Http://Dx.Doi.Org/10.5334/Sta.Dl
Tuan Minh Le (2003) “Value Added Taxation: Mechanism, Design, and
Policy Issues” World Bank
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