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