Rev­enue Con­cerns

Afghanistan’s tax rev­enue sys­tem re­mains in a sham­bles. A Semi-Au­tonomous Rev­enue Author­ity could be the an­swer to the coun­try’s crip­pling prob­lems.

Southasia - - Contents - By Baseer Omaid

Afghanistan needs eco­nomic re­struc­tur­ing if it hopes to achieve some sta­bil­ity.

Afghanistan is one of the poor­est coun­tries in the world, heav­ily de­pen­dent on for­eign fi­nan­cial as­sis­tance. Ac­cord­ing to the World Pol­i­tics Re­view 2012, al­most 90 per­cent of pub­lic spend­ing in Afghanistan ar­rives from in­ter­na­tional donors. In light of the chal­leng­ing sce­nario of 2014 when for­eign troops will with­draw and for­eign aid will dwin­dle, the coun­try will un­dergo a tran­si­tional phase where it will have to be­come self-suf­fi­cient eco­nom­i­cally rather than be re­liant on for­eign aid.

The jour­ney will not be smooth or easy. It will be time-con­sum­ing as well as chal­leng­ing. In ad­di­tion, the cur­rent gov­er­nance struc­ture of the Afghan state, es­tab­lished post2001, does not pro­vide a promis­ing sce­nario for the fu­ture. One of the main chal­lenges that the Afghan state faces to­wards self-re­liance is the abil­ity to raise domestic rev­enues. Most of the po­lit­i­cal and ad­min­is­tra­tive struc­tures are gov­erned by elite and are prone to abuse by the po­lit­i­cal power wield­ers. The post-2014 Afghan state will have to face hu­man se­cu­rity threats but

at the same time as­sure all ba­sic ser­vices such as health, ed­u­ca­tion, in­fra­struc­ture, roads, and elec­tric­ity, etc. The chal­lenge is im­mense, given that 36 per­cent of the Afghan pop­u­la­tion lives be­low the poverty line. There are no magic so­lu­tions to the Afghan peo­ple’s prob­lems and politi­cos will have to un­der­take cau­tious and prac­ti­cal mea­sures to over­come th­ese chal­lenges. With dwin­dling aid money, the Afghan state would need to raise its own rev­enue to de­liver ba­sic ser­vices to the peo­ple.

The cre­ation of a Semi-Au­tonomous Rev­enue Author­ity (SARA) as a pub­lic sec­tor re­form body could bring in some ef­fec­tive­ness and ef­fi­ciency in terms of tax ad­min­is­tra­tion, which could even­tu­ally re­sult in boost­ing the over­all eco­nomic func­tion­ing of the state. Con­versely, it would avoid nepo­tism, cre­ate em­ploy­ment op­por­tu­ni­ties for skilled young pro­fes­sion­als and ul­ti­mately stay im­mune from po­lit­i­cal in­ter­fer­ence. At present, the coun­try’s rev­enue ad­min­is­tra­tion (RA) is part of the Min­istry of Fi­nance in Afghanistan. There is an ur­gent need to es­tab­lish a semi-au­tonomous agency, which could raise domestic rev­enue to help and em­power lo­cal Afghans to be eco­nom­i­cally self-suf­fi­cient rather than de­pend on for­eign aid.

One of the key chal­lenges of post-2014 gov­er­nance in Afghanistan will be fis­cal sus­tain­abil­ity. A de­cline in for­eign aid cou­pled with mea­ger domestic rev­enue is ex­pected to re­sult in a fis­cal cri­sis. The World Bank es­ti­mates a fi­nanc­ing gap of ap­prox­i­mately 25% of GDP, which is equal to USD$7.2 bil­lion per year. Sim­i­larly, the cur­rent tax gap of nearly 60% leaves the coun­try and its lead­ers, with no op­tion but to think of a strat­egy that could gen­er­ate domestic rev­enue. Taxes and a bet­ter tax­a­tion pol­icy are among the pre­req­ui­sites of mod­ern-day po­lit­i­cal accountability and good gov­er­nance. In ad­di­tion, ex­ces­sive cor­rup­tion in the Afghan pub­lic sec­tor makes it even more chal­leng­ing. In Au­gust 2012, Tolo News, Afghanistan’s largest news agency, gained ac­cess to the Min­is­ter of Fi­nance’s ac­counts. Ac­cord­ing to the re­ports, the Min­is­ter had re­ceived more than USD 900mn from Afghan busi­ness firms. The

One of the key chal­lenges of post-2014 gov­er­nance in Afghanistan will be fis­cal sus­tain­abil­ity. A de­cline in for­eign aid cou­pled with mea­ger domestic rev­enue is ex­pected to re­sult in a fis­cal cri­sis . The World Bank es­ti­mates a fi­nanc­ing gap of ap­prox­i­mately 25% of GDP, which is equal to USD$7.2 bil­lion per year.

sub­se­quent report ac­cused the Min­is­ter of re­ceiv­ing money in a form of bribes af­ter he ex­empted big busi­nesses from paying taxes. Given the na­ture of the Afghan government and so­ci­ety, the cur­rent rev­enue ad­min­is­tra­tion is vul­ner­a­ble and open to politi­ciza­tion. It is also widely spec­u­lated that the Afghan rev­enue de­part­ment is con­sid­ered a source of huge il­licit in­comes. Con­se­quently, like many other de­part­ments in Afghanistan, peo­ple with po­lit­i­cal in­flu­ence over the rev­enue ad­min­is­tra­tion hire in­di­vid­u­als on the ba­sis of nepo­tism and pa­tron­age. The func­tion and work of un­pro­fes­sional and non-skilled work­ers makes the tax ad­min­is­tra­tion in­com­pe­tent, in­ef­fec­tive and un­fair. Even­tu­ally, it di­min­ishes the peo­ple’s trust in tax ad­min­is­tra­tion and re­sults in non­com­pli­ance.

Tax ad­min­is­tra­tion re­form can be a vi­able so­lu­tion in ad­dress­ing tax gaps in coun­tries where there is an in­abil­ity to raise le­gal taxes. A SARA is usu­ally cre­ated for numer­ous rea­sons. First, there is much rigid­ity in civil ser­vice rules and reg­u­la­tions. Se­condly, the per­cep­tion of cor­rup­tion within the tax ad­min­is­tra­tion is some­what true. Thirdly, peo­ple don’t com­ply due to their neg­a­tive per­cep­tion about accountability or checks and bal­ances in the en­force­ment of tax rules and reg­u­la­tion. Due to the in­her­ent draw­backs (cor­rup­tion, nepo­tism, fa­voritism, etc.) of the Afghan Pub­lic Sec­tor and the im­por­tance of rev­enue mo­bi­liza­tion, a semi-au­tonomous agency will en­able the rev­enue ad­min­is­tra­tion to at­tain im­por­tant tasks. Re­cruit­ing and man­ag­ing hu­man re­sources with­out re­sort­ing to civil ser­vice rules is es­sen­tial. The ad­min­is­tra­tion will also be bet­ter equipped to plan and man­age tax­a­tion. Most im­por­tantly, the ad­min­is­tra­tion re-

mains im­mune from po­lit­i­cal in­ter­fer­ences. On the wider scale, it will en­hance the qual­ity of gov­er­nance in ser­vice de­liv­ery through in­creas­ing a com­pe­tent, ef­fec­tive and fair tax ad­min­is­tra­tion. A re­formed tax ad­min­is­tra­tion will even­tu­ally em­power lo­cal Afghans.

The idea to es­tab­lish a semi­au­tonomous rev­enue ad­min­is­tra­tion agency is not new. From 1987 to 2000, most Latin Amer­i­can states - Ar­gentina, Peru, Colom­bia, Venezu-ela, Mex­ico, Guatemala and Guyana - es­tab­lished semi­au­tonomous tax rev­enue au­thor­i­ties. African coun­tries like Ghana, Uganda, Zam­bia, Rwanda, Kenya, Tan­za­nia, Malawi and South Africa also es­tab­lished their semi-au­tonomous tax rev­enue au­thor­i­ties at around the same time as the Latin Amer­i­can states did. Most of th­ese re­forms took place when th­ese states were un­der se­vere fis­cal pres­sure to in­crease rev­enue and max­i­mize the per­for­mance of the ad­min­is­tra­tion. The so­lu­tion was to de­politi­cize the rev­enue ad­min­is­tra­tion and make it more “busi­ness-like.”

The Afghanistan In­vest­ment Sup­port Agency (AISA) was cre­ated in 2003 af­ter there was a need felt by both the In­ter­na­tional Com­mu­nity and the Afghan government to pro­mote in­vest­ment in the coun­try. Since its es­tab­lish­ment, for­eign di­rect in­vest­ment in Afghanistan grew from US$ 49mn to US$ 216mn from FY2003-2004 to FY20052006. Due to lack of trans­parency and accountability in the Afghan tax rev­enue de­part­ment and given the im­por­tance of state build­ing, a de­politi­cized, ef­fec­tive and ef­fi­cient tax ad­min­is­tra­tion will not only ad- dress the fis­cal sus­tain­abil­ity is­sue but will also con­trib­ute to state build­ing in Afghanistan.

Semi au­tonomous agen­cies bear risks and chal­lenges of their own. Afghanistan’s nar­row tax base is sub­ject to ram­pant tax eva­sion and ar­bi­trary ex­emp­tions. In 1970, the tax-to-GDP ra­tio in Afghanistan was only 7 per­cent, one of the low­est in the world. Ad­di­tion­ally, the gen­eral ca­pac­ity is­sue in the coun­try can be a chal­leng­ing fac­tor to the es­tab­lish­ment of a semi-au­tonomous tax author­ity. The dif­fi­culty of tax­ing the agri­cul­ture sec­tor has its own chal­lenges.

Afghanistan, like any con­flic­trid­den coun­try, has sev­eral pub­lic and pri­vate sec­tor de­fi­cien­cies that need to be re­formed. Gen­er­at­ing rev­enues at the domestic level is one of the test­ing tasks for the Afghan government to pre­vent re­liance on for­eign as­sis­tance and pro­vide bet­ter fa­cil­i­ties and ser­vices to its peo­ple in a post2014 sce­nario. A semi­au­tonomous rev­enue author­ity will help cre­ate bet­ter eco­nomic op­por­tu­ni­ties for the Afghan youth, which needs to be mo­bi­lized and uti­lized in the best pos­si­ble way to stay pos­i­tive and work con­struc­tively. At the same time, it will help dis­trib­ute the money raised through tax­a­tion poli­cies and ad­dress non-con­ven­tional se­cu­rity threats such as poverty, il­lit­er­acy, ac­cess to por­ta­ble water, etc. Baseer Omaid is cur­rently pur­su­ing a post-grad­u­ate de­gree in Gov­er­nance and Devel­op­ment from the In­sti­tute of Devel­op­ment Stud­ies (IDS), Univer­sity of Sus­sex. He has pre­vi­ously worked at the Min­istry of Ru­ral Re­ha­bil­i­ta­tion and Devel­op­ment in Kabul and writes on is­sues con­cern­ing Afghanistan, Pak­istan and In­dia.

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