LOCAL TAX REFORM IN THE KYRGYZ REPUBLIC
Elima Karalaeva1
Abstract
While the public finance system in the Kyrgyz Republic was inherited from commanded economy and remains quite
ineffective, the government has made little progress over the past decades. The central budget and local budgets of
self-governments are built on the principle of unity meaning that all budgets are linked to one revenue system. On
one hand, the central authorities have a broad power and competencies to influence and coerce, and on the other
hand, the local self-governments (LSG) are financially dependent and have limited right to review, approve, and
execute their own budgets. Thus, the formation of budgets and determination of revenue sources and transfers lies
within the competencies of the central government. A decentralized fiscal system could play an important role in
improving governance mechanism, transparency and better targeting of fiscal resources as local government is better
positioned and more responsive to local aspects of social needs with respect to resource mobilization and allocation.
The Government of Kyrgyz Republic (KR) has chosen fiscal decentralization to enhance local governance system,
to encourage private sector growth and to reduce poverty.
In an effective market economy, local taxes play an important role as a major revenue source of local governmental
funds and important economic regulator. Thus, it is necessary for countries in transition (CITs) to achieve these
objectives of taxation. While many CITs experienced serious budgetary problems, a rational local tax reform would
be helpful to meet the revenue needs of local governments and to achieve fiscal stabilization in the transition period.
Moreover, tax reform facilitates and supports other economic reforms necessary for restructuring of economic
mechanism.
The paper is motivated by the questions about the main directions of local tax reform in Kyrgyz Republic, the
performance and dynamic of local budget revenues and deficits during the transition period. The goals of the study
are to review and evaluation the local finance reform process in Kyrgyz Republic, to identify particular reform
components, their mutual relations, time and content restrictions, and to examine the effects of the actual financial
and economic crises to local government finance. Organizational structure of the paper would include detailed
discussion of data sources and procedures used to develop the county specific dataset, local budget revenue sources
and expenditure analysis, and evaluation of the local taxes performance.
The overall objectives include looking at the dynamic of local revenues and expenditures in 1990-2008 period to
assess the quality of the budget system at local government level and to develop an up-to-date picture of the regional
economic situation in the Kyrgyz Republic, underlining some problems of local tax reform, especially in tax
administration, and establishing a baseline for monitoring the progress of municipal finance reform in the future.
Therefore, the study would involve elements of both explorative and descriptive research. The source of information
data is the Ministry of Finance, the Treasury, the State Tax Inspectorate, the National Bank and the National
Statistical Committee of the Kyrgyz Republic. Key materials would be obtained from the World Bank, the
International Monetary Fund, the United States Agency for International Development, the UK’s Department for
International Development, the Swiss Development Agency, and European Union TACIS. Archival materials would
include legislative materials at the state and local levels, advocacy materials prepared by governmental and research
institutions, diagnostic reports, transcripts, consultant reports, feasibility studies, official notices, and policy
statements.
The paper is concluded by examining several lessons from the first decades of the local tax reform in Central Asia
and offering some recommendations. The recommendations would propose immediate changes in local tax
administration of Kyrgyz Republic to strengthen the existing tax system and to prepare the way for more
fundamental public finance reform in the long-term.
1
Elima Karalaeva is an Assistant Professor of the Public Administration Program at the American University of
Central Asia, Bishkek, Kyrgyz Republic, Personal Website: http://eportfolio.auca.kg/view/view.php?id=119
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
1. Introduction
The past decades have been witness of the transition from centrally-planned economies (CPEs) to market-based
economy as one of the largest experiments in the economic history. Virtually economic reform in the countries in
transition (CITs) has encompassed every sector of the economy, and degrees and pace of the reform has varied
significantly2. Particularly, tax reform has been widely recognized as critical one to the success of the economic
transition3. The available evidence suggests that the scope, speed, and stability of economic reforms, including tax
policy and administration reforms, significantly influenced the ability of CITs to reestablish economic growth during
the transition.4
While the public finance system in the Kyrgyz Republic was inherited from commanded economy and remains quite
ineffective, the government has made little progress over the past decade. The central budget and local budgets of
self-governments are built on the principle of unity meaning that all budgets are linked to one revenue system.
According to the Musgrave-McLure,5 revenues from progressive personal and corporate income taxes designed to
redistribute income have been reserved by the central government. Also, the creation and execution of budgets is
based on the central government ruling. On one hand, the central authorities have a broad power and competencies
to influence and coerce, and on the other hand, the local self-governments (LSG) are financially dependent and have
limited right to review, approve, and execute their own budgets. Thus, the formation of budgets and determination of
revenue sources and transfers lies within the competencies of the central government.
In an effective market economy, local taxes play an important role as a major revenue source of local governmental
funds and important economic regulator. Thus, it is necessary for countries in transition to achieve these objectives
of taxation. While many CITs experienced serious budgetary problems, a rational local tax reform would be helpful
to meet the revenue needs of local governments and to achieve fiscal stabilization in the transition period. Moreover,
tax reform facilitates and supports other economic reforms necessary for restructuring of economic mechanism. 6
The goals of the study are review and evaluation the local tax reform process in Kyrgyz Republic during the first
decades of the transition to the market economy, assessment of the revenue-generating prospects of local budget
system during global financial crisis, identification of the problems hampering the achievement of an optimal local
government finance performance, and suggestion the ways to overcome barriers to local tax reform. Organizational
structure of the paper would include overview of the local tax system, detailed discussion of data sources and
procedures used to develop the county specific dataset, local budget revenue sources and expenditure analysis, and
evaluation of the local tax performance.
Review of the analytical works is focused on similar researches and covered reports on progress comparable to
World Bank, International Monetary Fund, United States Agency for International Development, UK’s Department
for International Development, Swiss Development Agency, and European Union TACIS. Key materials would be
obtained from the Ministry of Finance, 7 the Treasury, the State Tax Inspectorate, the National Bank and the National
Statistical Committee of the Kyrgyz Republic. Therefore, Section 2 reviews the major works undertaken by
government agencies and international organizations and provides background information on political and
economic context of the Kyrgyz Republic to allow sufficient understanding of the core characteristics of the local
public finance system and the wider context to local tax reform. Section 3presents the evaluation of the local tax
system and identifies the arguments for economic policy reforms to strengthen local financial management, fiscal
decentralization and an efficient tax administration. Finally, Section 4 presents conclusion and recommendations,
provides summary of the lessons from the in Central Asia Region (CAR) tax reform experiment.
Ebrill, Liam and Oleh Havrylyshyn. 1999. “Tax Reform in the Baltics, Russia, and Other Countries of the Former
Soviet Union.” Occasional Paper 182, International Monetary Fund, Washington D.C.
3
European Bank for Reconstruction and Development. 1999. “Transition Report.” London: European Bank for
Reconstruction and Development.
4
Barbone, Luca, and Hana Polackova. 1996. “Public Finances and Economic Transition.” MOCT/MOST 6:35-61.
5
Musgrave, Richard, and Peggy Musgrave. Public Finance in Theory and Practice. 5th ed. New York: McGrawHill, 1989.
6
Tanzi, Vito. 1992. “Fiscal Policies in Economies of Transition.” Washington D.C.: International Monetary Fund.
7
Ministry of Finance of the Kyrgyz Republic http://www.minfin.kg/eng/modules/smartsection/item.php?itemid=125
2
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
1.1. Objectives and Research Methodology
The overall objectives include looking at the dynamic of local revenues and expenditures in 1990-2008 period to
assess the quality of the budget system at local government level and to develop an up-to-date picture of the regional
economic situation in the Kyrgyz Republic, underlining some problems of local tax reform, especially in tax
administration, and establishing a baseline for monitoring the progress of municipal finance reform in the future.
Therefore, the study would involve elements of both explorative and descriptive research.
Accomplishment of the objectives would require the following tasks:









Conduct a review of research literature on local tax reform in countries in transition.
Develop a critical review of current local finance practices and key problems in Kyrgyz Republic.
Identify and describe the types of data that are available regarding local tax administration and revenue sources.
Determine the accessibility, limitations, and credibility of the data.
Develop methodology to measure and evaluate local revenues and expenditures.
Analyze the main features of the local tax system in Kyrgyz Republic and examine the progress in
modernization of the local financial management.
Develop recommendations for local tax reform in Kyrgyz Republic.
Present the preliminary paper to selected coordinators of working group to validate the assessment and obtain
feedback.
Based on review, revise the recommended strategies, methods, and tools included in the methodology.
Prepare and submit a final paper including the final methodology.
1.2. Data Sources
The source of information data is the Ministry of Finance (MOF) and the National Statistical Committee of the
Kyrgyz Republic (NSC).8 Archival materials would include legislative materials at the state and local levels,
advocacy materials prepared by governmental and research institutions, diagnostic reports, transcripts, consultant
reports, feasibility studies, official notices, and policy statements.
Regular reporting data is a basis of the statistical system, and it is considered to be the most important information
source for making estimations. During using statistical reporting data of branches affected by the shadow economy,
researchers can face the problem of analyzing the quality of direct information. As a statistical body does not carry
out controlling function, information obtained from the companies by the statistical body is strictly confidential and
could not be used as a ground for imposing fines, penalty fees and taxes. In fact, it is difficult to distinguish wrong
and reliable information, containing in the reports. Theoretically, casual errors can be corrected by the law of large
numbers, because assignable errors may cause significant perversities. Despite the lack of independent statistical
information, there are some sources that help to conduct research and to obtain the definite results, including
the scientific institutes, universities, think-tanks, public organizations and individual experts.
8
National Statistical Committee of the Kyrgyz Republic http://www.stat.kg/English/index.html
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
2. Kyrgyz Republic: Local Revenues and Expenditures
2.1.
Macroeconomic Analysis and Trends
The Kyrgyz Republic is a small, mountainous country with an agricultural economy and a population of 5.1 million.
In 2006, GDP per capita was 536.00 USD (Exhibit 1.). The country obtained independence on August 30, 1991 and
enjoyed a wide-spread reputation as the most democratic and market-oriented country in Central Asia. In 1990s, the
Kyrgyz Republic experienced substantial transformation shock and macroeconomic instability, loss of transfers, oil
price adjustments, collapse of economic relations with former partners and great reduction in tax collections. As
spending was financed through domestic credits and donor assistance, an institutional collapse was avoided. In mid1990s, the initial economic indicators have been recovered. Despite the regional financial crisis of 1998, the average
annual growth of real GDP was 5.2% in 1996-2004 varying between 9.9% in 1997 and 0% in 2002, and reflecting a
substantial decline in poverty rates from an estimated 52% in 2000 to 35% in 2004.9 The GDP growth has gone
primarily to private consumption, while government consumption experienced only a minor increase. Since 2000,
the macroeconomic performance has improved significantly in comparison with other countries in Central Asia
region. For the period 2001-2006, the average consumer price index (CPI) was below 5%, reflecting a prudent
monetary policy during a rapid demonetization of the economy. Responsible fiscal and monetary policies have
helped to reduce annual inflation to 5% and the budget deficit to 5% of GDP, diminish the current account deficit,
and stabilize the national currency. Also, the fiscal position has changed from a primary balance of -6.9% of GDP in
2000 to an estimated balance of -2.5% in 2004.10 However, the economic growth was concentrated in few sectors,
such as gold mining, agriculture and trade, and lagged behind the most CIS countries. Long-term macroeconomic
sustainability needs stability of the national currency, low inflation and keeping fiscal and current account deficits
under control. The economic and political comparison with other CIT could be complicated because of the country
size, unique geopolitical position and significant natural recourses (gold and water).
The legal and institutional framework of the Kyrgyz Republic has changed considerably. Local government
spending as a percentage of GDP was 6.33% in 2007, which is the average for 16 countries with similar income
levels in Europe and Central Asia (Exhibit 3). While tax rates and contributions are suitable to international practice,
tax compliance is very poor resulted in low revenue outturns. Local revenues and grants are counted 6.33% of GDP
in 2007, and external debt is amounted to $1.98 billion or 1.75% of GDP in 2006 (Exhibit 6). As high debt continues
to be a key policy constraint, the Paris Club of creditors granted a relief for the Kyrgyz Republic in 2005 with
estimated reduction in the Net Present Value of official bilateral debt by 36%. Despite the Paris Club action, the
fiscal consolidation is required for further reduction of debt levels.
The events of March 24, 2005 and April 7-8, 2010 have created a unique opportunity to reform the Kyrgyz
Republic’s economy, to shift towards human rights, the principles of free elections, freedom of political parties and
the mass media, and to increase the efficiency, transparency, and accountability of government agencies. The
government identified that low living standards, high unemployment, and corruption are the three key problems in
the country.
Therefore, the objectives of tax reform are continued fiscal consolidation, building fiscal institutions, promoting
fiscal transparency and improving public sector accountability.
According to the Index of Economic Freedom, the Kyrgyz Republic's economy is free by 59.9% ranked 79 th in the
world in comparison with 82.0% in US and 81.7% in UK. Fiscal freedom and labor freedom in the Kyrgyz Republic
score highly, while monetary freedom, trade freedom, and freedom from government somewhat less highly. The
labor system is very flexible, and the implementation of a new Labor Code has helped to adopt employers to freemarket conditions. The top income and corporate tax rates are low, and government expenditure is moderate. The
investment freedom, property rights, and freedom from corruption are weak. Foreign investments are harmed by
bureaucratic incompetence and opaque regulatory enforcement. The weak rule of law allows for significant
corruption and insecure property rights. 11
9
International Monetary Fund. 2005. 6th Review under the Poverty Reduction and Growth Facility, February 2005.
National Statistical Committee of the Kyrgyz Republic.
11
Heritage Foundation www.heritage.org
10
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
2. 2. Legal and Organizational Framework
According to the subsidiary standard, local governments are more efficient than national government in the
provision of public services and management of infrastructure projects because of closer supervision, proximity to
the work site, “ownership” and greater accountability to local clientele. Therefore, strong and well-focused system
of decentralized governments needs to clearly delineate the rights, duties, responsibilities, and functions among local
and central government in the constitution, national laws, and regulations. However, the subsidiary framework is
invalid for Kyrgyz Republic with five million inhabitants, as local self-government is carried out by the central
government administration through de-concentrated units in the form of oblast administrations.
The Constitution of the Kyrgyz Republic12 does not elaborate clearly on the separate functions of local state
administration. Article 76 indicates that executive power on the territory of the respective administrative territorial
unit is carried out by the local state administration in oblasts, rayons and gorods. Oblast governors and rayon akims
are responsible for administration of state policies and programs within their respective territorial domains carried
out by the popularly elected kenesh (local council).
Chapter Seven of the Constitution defines the responsibilities and authorities of “local self-governance.” Particular,
local self-government is exercised through the local keneshes and other bodies, which may be formed by the
population itself in the procedure established by law. Bodies of local self-government may have communal property
in their own possession and may be endowed with separate governmental powers, accompanied by transfer [to them]
of the material, financial, and other means necessary for their execution. Bodies of local self-government are
accountable to state bodies concerning delegated power. Local keneshes approve and control programs of socialeconomical development of the territory and social protection of the population; approve the local budget and report
on its implementation; and, hear information on the use of extrabudgetary funds. In practice, rayon pursues an
independent budget policy as no differentiation of powers exists within oblast.
Chapter Three, Section Two, Article 46, 1, 5) states that the President of the KR appoints in consultation with the
Prime Minister and with the consent of the appropriate local keneshes, the heads of state administration of oblasts,
rayons and cities, and relieves them of their offices.
The law Local Self-government and Local State Administration, first promulgated in 1991,13 defines local selfgovernance as system of local keneshes, territorial local governance bodies (micro rayon and housing complex
councils and committees, house, street, quarter, posyolok, and ail committees and other bodies) as well as local
referendums, meetings of citizens, and other forms of direct democracy. However, this broad and confusing
definition of local self-governance is beyond the capacity of the intergovernmental fiscal system. 14
Revenues and expenses of local keneshes are formed in compliance with the law of KR Basic Principles of
Budget Law in the Kyrgyz Republic.15 Article 2 assigns responsibility and authority for the preparation and approval
of republican and local budgets. The local administrations, organs of local self-government build up and perform
local budgets, considered and approved by local keneshes. The structure of local budgets includes oblasts, the city of
Bishkek, rayons, cities, city districts, towns and villages, in which the state power is exercised by local keneshes of
the appropriate territorial levels and aiyl okmotus (village governments). According to Article 50, local governments
submit kenesh-approved local budgets to financial authorities of higher level governments for the incorporation in
the state (consolidated) budget and compliance of general state tax rates and sizes of categorical, equalization and
stimulating (share) grants of the republican budget with the targets set out by Jogorku Kenesh (Parliament) of the
Kyrgyz Republic. Additional expenditures for the local budgets are included in the state budget of KR only if they
are covered through own real revenue sources. Changes and clarification on the local budgets revenues made within
a year must be coordinated with tax bodies and the Ministry of Finance of KR.
12
Constitution of the Kyrgyz Republic, Bishkek, March 5, 1991.
Law of Republic Kyrgyzstan. Local Governance and Local State Administration in Republic Kyrgyzstan. Bishkek,
April 19, 1991 # 437 – XII.
14
Law of Kyrgyz Republic. Local Governance and Local State Administration in Republic Kyrgyzstan. Bishkek,
January 12, 2002, # 5.
15
Law of Kyrgyz Republic. Basic Principles of Budget Law in the Kyrgyz Republic. Bishkek, June 11, 1998, # 78.
13
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Local Budgets Preparation and Execution
According to the Basic Principles of Budget Law in the Kyrgyz Republic, the local budgets preparation process for
the next fiscal year begins from the primary level (ail okmotu). The revenue and expenditure projections submitted
in “down-top” direction from ail okmotus through oblasts and rayons budget commissions to the Ministry of
Finance. Based on the resources available and the results of negotiations, MOF delivers its own budget plans to the
local self-governments, including amendments and additions. In order to encourage local tax effort, the Ministry of
Finance raises the budget “projected” revenues by 25 –50% than the budget submissions of subordinate government.
In general, the Ministry of Finance prepares its own set of local revenue collection targets and sets the salary and
employment levels in each oblast. Oblasts, rayons and ail okmotus have little power in resource allocation and
project their revenues based on “indicative plans” of the republican government. If local government reaches the
targets established by the Ministry of Finance and devote the financial savings to other uses, the local budget cut
will occur or vice versa. As this budget planning does not leave rooms for incentive and creativity, the local budgets
do not capable to reflect local needs, desires, and address local issues. In conclusion, despite the intentions and the
legal framework with regard to local self-government, the Kyrgyz fiscal system is highly centralized.
2. 3. Local Government Perspective
The financial system of the Kyrgyz Republic includes four pillars: republican budget, seven oblast budgets, two city
budgets of republican rank (Bishkek and Osh), 40 rayon budgets, and 472 local budgets (ajyl okmotu). Research of
the international experts revealed that only 52 or 11% of the 472 local budgets have the capacity to finance 100% of
their expenditures.16 Presently, local self-governments have the following major sources of revenues: 17

transfers (grants) from one level of government to the others

local taxes and fees stipulated by the Tax Code18 and collected by State Tax Inspectorate (STI)

share in national taxes and other revenues

non-tax payments (special “means”)

land tax and land fee/ lease

state duty on the value of real estate transactions

revenues from local budgetary organizations and special resources.
The first tier of local government is financed through the central and local budgets. Cities and village budgets are
prepared by the aiyl okmotu and submitted to the local authorities for approval. In compliance with tax legislation,
local self-governments have the right to impose local taxes and fees, and to determine tax rates, but have little fiscal
autonomy as their budgetary support in form of equalization grants could be cut. The major source of local revenues
is transfers received from the central budget in the amount of 52% of local income in FY1997. Equalization grants
are made from the republican budget to the oblasts, which in turn make similar grants to rayons, to cover projected
budget deficits. Central (republican) budget transfer categorical grants to oblasts and Bishkek, which further moved
to rayons responsible for ail okmotus financing. The second valuable revenue source is shared taxes comprised 23%
of total income.19 Shared taxes are based on a sharing formula of the revenues transferred from the central budget.
However, tax sharing should not be the sole method of revenue assignment for sub-national governments.
Each sub-national government has its “own” revenue sources including sixteen local taxes and fees, and three shared
(regulated) taxes. According to the benefit principle, the local taxes should be spent within the jurisdiction of the
particular local government where these revenues have been collected. In contrast, the motor vehicle tax is allocated
to a national fund, established by the law Uniform Road Fund, and sub-national authorities do not have enough
16
The Fiscal Decentralization Initiative for Central and Eastern Europe. The Challenges of Decentralization in the Kyrgyz
Republic: Summary. Open Society Institute, 2007, p. 6.
17 Alymkulov, Emil and Kulativ, Murat. Local Government in the Kyrgyz Republic. Developing New Rules in an Old
Environment: Local Governments in Eastern Europe, Caucasus and Central Asia, Chapter 10, 2001, p. 551.
18 Tax Code of Kyrgyz Republic. Bishkek, June 26, 1996, # 25
19 Asian Development Bank. Fiscal Decentralization Study: In Support of the National Strategy for Poverty Reduction of
Kyrgyzstan. Final Draft.TA 3458 KGZ, September 6, 2000, p. 24.
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
resources to maintenance and repair their roads. Personal income tax and real estate duty cover only a small part of
the local government community activity, while local budgets are responsible for the expenditures on housing and
utilities. In practice, it is impossible for local governments to utilize the method of municipal borrowing, according
to the law Basic Principles of Budget Law20, since they lack the means to settle the debt.
The land tax is the most important local tax for rural ail okmotus came to 15% of total income, or about 30% of all
non-transfer income. LSG depend heavily on the land tax collected only on agricultural land in September. Due to
the collection of land tax in the third quarter, categorical grants cover almost 90% of spending during the first half of
the year. Thus, land tax-focused local governments experience the lack of resources for the first three quarters of the
year and are looking for central government support to cover this cash flow gap.21 The retail sales tax produces main
revenue for Bishkek. Thus, benefit taxes are appropriate at local level.
The systematic over-projection of revenues indicates the optimistic oblast revenue projections imposed by the
Ministry of Finance as “control” figures. In addition, this estimation bias has gotten worse over the period. From the
oblast and rayon administration’s perspective, the Ministry of Finance (MOF) is overly optimistic of the revenue
capacities of the regions. From the MOF perspective, oblasts and rayons consistently are not making enough
revenue efforts (Exhibit 4).
Local Revenues
The major source of revenues for local administration and self-government are “shared revenues” or national
“regulated” taxes (personal income tax, profits tax, and excises) collected by the State Tax Inspectorate (STI), and
shared to republican budget as 65% of collections, oblast and rayons gets 20% and 15% respectively.
Local keneshes have little substantive role deciding how resources will be mobilized and what local taxes rates will
be charged within their jurisdictions. While local governments may chose from 16 sources of local taxes and fees
prescribed by Tax Code (Attachment), the State Tax Inspectorate actually collects all local taxes. Moreover, local
administrations have found that their budgetary support as “equalization grants” will be cut in return to “own
revenues” generation, which provides little motivation for local keneshes to impose taxes upon their constituents.
Local government and administration depend heavily on the land tax collected only on September. Due to the
collection of land tax in the third quarter, categorical grants cover almost 90% of spending during the first half of the
year. Thus, land tax-focused local governments experience the lack of resources for the first three quarters of the
year and are looking for central government support to cover this cash flow gap.
The decentralization reform assumes the transition to an objective and transparent system of intergovernmental
relations. Formalization of inter-budgetary transfers requires the development of a distributing formula among local
budgets and a specific method for equalizing the budget receipts of ajyl okmotu. Revenue capacity can be assessed
using economic development indicators or total value of tax due from taxpayers in the corresponding territories.
However, the stated indicators are not part of the official governmental accounting system for ajyl okmot. Instead,
local budget performance reports contained very different national and local taxes allocation information in
FY2007-2008. Moreover, the metrics did not satisfy budgetary process requirements as revenue planning for local
budgets requires valid information on the local tax base. Within statistical system, many indicators are invalid or not
existing because businesses do not present information to the National Statistics Committee. The Ministry of
Finance plans to elaborate the necessary indicators and reporting forms through FY2010.
The issue of financial accountability of local budgets is not simple. According to the functional classification of
expenditures, two types of local budget performance reports based on detailed budget lines and on budget types are
required to evaluate expenditure obligations at all budget levels. However, this information is not publicly available.
So, in order to obtain it, the Ministry of Finance prepared and sent the requisite enquiry. As the reports include only
oblast level breakdown, the Ministry of Finance has no official information about local budget performance of ajyl
okmotu and cities. Furthermore, the budget institutions network information is available in paper-based format only
for oblasts level.
20
Law of Kyrgyz Republic. Basic Principles of Budget Law in the Kyrgyz Republic. Bishkek, June 11, 1998, # 78.
Asian Development Bank. Fiscal Decentralization Study: In Support of the National Strategy for Poverty Reduction of
Kyrgyzstan. Final Draft.TA 3458 KGZ, September 6, 2000, pp. 26-28.
21
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
If all local tax revenue will remain in the hands of local authorities, local budget expenditures still greatly exceed
revenues. For this reason, local administrations and self-governments still received transfers from the central budget
to balance their budgets. Due to lack of financing, other functions set out in the law Local Self-Government and
Local State Administration,22 are formally conducted. In order to ensure a sufficient level of revenues, local
government should emphasize on the need for a review of the inter-budgetary relations and revenue distribution
system. Moreover, LSG authorities should take into account the actual correlation between the performance of own
and delegated functions, and the appropriate level of local financing. However, the revenue level and the local tax
base shrink substantially which are insufficient to satisfy a minimal level of local expenditures. Also, the actual
revenues performance is the only valid data reflecting local budget revenues. The lack of statistical data and tax
reporting is evident of a significant mismatch in the application of revenue evaluation methods. The average
deviation of estimated tax potential from actual values ranges from two to six times. Therefore, local authorities
could increase their commitment to economic development and tax benefits provision by registering the 5-6 main
sources of revenue.
Intergovernmental Transfer System
Categorical grants comprised 6.7% of FY2000 Republican Budget are allocated through the oblasts to the rayons
and ail okmotus to ensure basic education and health protection, and fund salaries and contributions to the Social
Fund. However, categorical grants are unreliable and inflexible budgetary revenue source, since they usually cover
remunerations and the levels of employment for these sectors are already authorized by the state.
Equalization “gap filling” grants come to about 1.4% of FY2000 Republican Budget and are distributed to poorer
oblasts, based on oblast’s poverty rate and projected local fiscal deficit. Sometimes, oblasts contribute transfers to
the Republican Budget in the form of a “planned surplus.” Transfers to the republican budget in FY2000 are planned
at 1.2% of all republican revenues and grants. 23
Intergovernmental assignment of expenditures and revenues could result in fiscal imbalances. Vertical fiscal
imbalance (tax base overlap) occurs when expenditures assigned to a specific level of government exceed revenue
from “own sources”. Horizontal fiscal imbalance (tax competition) occurs when a net measure of revenue capacity
and expenditure needs varies across sub-national jurisdictions. Overall, the available fiscal data is insufficient to
demonstrate the presence of fiscal externalities and inadequate for reliable comprehensive measurement of tax
exporting and tax competition.
Horizontal fiscal imbalances are inevitable given the unequal geographic distribution of economic activity, natural
resources and demographic factors. Urban zones of KR tend to be wealthier, with higher incomes, and may possess
greater tax capacity. Also, vertical imbalances are common to multilevel fiscal systems and can be measured by
intergovernmental transfers as a share of sub-national expenditures.24 The revenue distribution for the local sector by
regions includes considerable variance among the different oblasts and cities. Bishkek is independent from the
central budget: categorical grants are about 2.5% of total and equalization grants are non-existing or negative. Osh,
Jalal-Abad and Issyk-Kul oblasts rely heavily on categorical grants. Equalization and categorical grants comprise
about 90% of all monies available to Naryn oblast and about 75% for Talas oblast. 25 Local government’s share in
total revenues and grants has been decreased over the past decade due to the decline in non-tax revenues collected
for local government and compensated by increases in equalization grants. While KR strongly relies on tax sharing
to accomplish the transferring of financial resources across levels of government and across jurisdictions, grants
should be distributed on the basis of a formula incorporating measures related to vertical and horizontal imbalances.
Additionally, “regulating” tax rates could rise according to the central government’s assessment of sub-national
regions fiscal gap.
22
Law of Kyrgyz Republic. Local Governance and Local State Administration in Republic Kyrgyzstan. Bishkek, January 12,
2002, # 5.
23
Asian Development Bank. Fiscal Decentralization Study: In Support of the National Strategy for Poverty
Reduction of Kyrgyzstan. Final Draft.TA 3458 KGZ, September 6, 2000.
24
25
International Monetary Fund. Fiscal Decentralization Indicators. Government Finance Statistics.
Asian Development Bank. Fiscal Decentralization Study: In Support of the National Strategy for Poverty Reduction of
Kyrgyzstan. Final Draft. TA 3458 KGZ, September 6, 2000, p. 24.
8
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Local Expenditures
Although the legislative competence should be local, local budgets spending programs are determined by the
Ministry of Finance. Nominally, local governments must budget and maintain financial control over their
expenditures. Really, budget expenditure decisions are made by MOF, and oblast and rayon administrations. Local
keneshes review budget implementation.
Education comprises about 53.74% of local administration and self-government budgets in 2008. Local government
is responsible for basic education spending in Kyrgyzstan. Particularly, ail okmotus provide kindergarten, primary
(1-4 grades), elementary (grades 1-9) and secondary schools (up to eleventh grade), rayons and oblasts provide little
schooling.
The majority of health care spending occurs at oblast, rayon and ails okmotu budgets. At the oblast level, hospitals
for adults, hospitals for children, and hospitals for maternity merged into seven “Oblast Merged Hospitals,” which
are responsible for the most of the country’s care services. Recently, local administrations have managed two-thirds
of all public health care spending. Therefore, health sector reform will have serious implications for the
deconcentrated form of government in Kyrgyzstan.
3. Kyrgyz Republic: Local Taxes Evaluation
3. 1. Local Taxes System
The Tax Code defines 16 types of taxes and fees for local self-governments (Exhibits 9-10). Local tax payments
comprise a small portion of sub-national revenues, insufficient for covering the basic needs of local selfgovernment. Replenishment of the local budget poses a real problem at the rural level, where only two or three local
taxes and fees can be collected. The local taxation experiences inconsistencies as many taxes yield insignificant
revenue and require considerable organizational and legal effort. 26 In addition, the legislation on local taxation is
frequently contradictory, including elements such as the double taxation issues, the lack of taxable entities in many
jurisdictions, and the substitution of taxes by duties. Overall, local taxes system could not promote the financial
autonomy to local self-governments. Thus, it is necessary to evaluate local taxes by LSG establishments themselves,
since they can overspend their estimated minimum as local taxes are included into the system of other revenues to
cover local expenditures and are not reflected in standard allocations for balancing the local budget. Generally, tax
revenue could be measured by using regression analysis of local tax effort. Tax reform in the Kyrgyz Republic
moves in the inverse direction as fiscal decentralization reform. According to the new Tax Code, the reduction in the
number of local taxes from sixteen to eight was the result of the abolition of eight small taxes, which were
inefficient:
1.
Fee Payable by Owners of Dogs
2.
Fee for the Right to Hold Local Auctions and Lotteries, Competitions and Exhibitions for Commercial Purposes
3.
Tax for the Right to Use Local Symbolism
4.
Fee on Deals at Exchanges of Commodities and Raw Materials
5.
Tax Payable by Persons Growing Flowers in Greenhouses and Selling Them to the Population
6.
Tax for the Right to Hunt and Fish
7.
Tax Payable by Tourists Leaving for Countries outside the CIS
8.
Video Saloons, Casino, Concerts and Shows Tax
The next reduction in the number of local taxes could be explained by change in status from local to central level
and by redistribution of taxes rates. These taxes include retail sales tax and tax on paid services to the population,
which is the fourth most important revenue source for local budgets.
26
Alymkulov, Emil and Kulativ, Murat. Local Government in the Kyrgyz Republic. Developing New Rules in an Old
Environment: Local Governments in Eastern Europe, Caucasus and Central Asia, Chapter 10, 2001, p. 556.
9
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
The remaining local taxes have to meet the following criteria as well as possible:27

connection between the volume of receipts and the population’s standard of living

capability of local government administration to affect the tax base and tax collection

tax base immobility

uniformity of tax base allocation throughout the territory

uniform revenue levels during a year

good predictability of taxes at the ajyl okmotu (municipal government) level.
Currently, rayon-level authorities determine local taxes, while ajyl okmotu has to execute the rayon administration
instructions. Thus, reduction in the number of local taxes realistically redistributed revenue generation power
between the central and local authorities. During the fiscal decentralization when local authorities are beginning to
receive real power, it would be very risky to delegate discretionary power on revenues to local authorities, since
their lack of experience and rudimentary knowledge of tax legislation.
Shared Taxes
Shares from national taxes such as personal income tax, corporate income tax, and excises on domestic products are
a major source of revenues for local administration and self-government, collected by the STI and transferred to subnational budgets in accordance with uniform rates. In FY1997, it was envisioned that republican budget would
receive 65% of collections, oblast and rayons could leave 20% and 15% respectively, further distributed to ail
okmotus. If regulated tax receipts, plus domestic VAT, exceed plans, 75% of the surplus will be shared with local
government.28 The advantage of the sharing method is that no need for equalization procedures. The tax-sharing
disadvantages include an inability of local governments to exercise much influence over their revenue and reduced
accountability.
Parliament would approve allocations for the central budget, while higher-level councils would approve fixed
allocation rates to subordinate local budgets for three years. In practice, the local administration determines the
amount of shared taxes to rayons and aiyl okmotu. Although, revenues are based on legally accepted formulas at the
oblast level, the assignment methods at the rayon level are not transparent. Instead, this process becomes dependent
on political, subjective and other factors. In addition, the law of KR Basic Principles of Budget Law prohibits the
establishment of extra-budgetary funds by LSG administrations.
3.2. Local Tax Reforming
A progressive property tax on land (rural and urban) and land improvements would provide a stable cash flow
throughout the year. The retail tax provides is major revenue source for Bishkek. However, sales tax has regressive
character in income distribution since poorer people consume a greater share of their incomes and do not accumulate
wealth. The land tax should be replaced or supplemented by a proposed Property Tax which is more equitable by
shifting the tax burden from urban to rural population.
Tax Administration
Multi-subordination of the State Tax Inspectorate employees to the STI headquarters in Bishkek and local
governments leads to confusion, lack of accountability and potentially split loyalties. The function of STI should be
only republican taxes collection, and the self-government should be responsible for its own tax receipts. Particularly,
rayon administration could introduce and collect the property tax. Overall, most of the current “local taxes” should
be eliminated since they are unproductive and tend to be nuisances.
27
A.N. Deryugin. The Kyrgyz Republic—Government Structure and Reform of the Budgetary System. The Challenges of
Decentralization in the Kyrgyz Republic. Local Government and Public Service Reform Initiative: Open Society Institute, 2007,
p. 6.
28
Asian Development Bank. Fiscal Decentralization Study: In Support of the National Strategy for Poverty
Reduction of Kyrgyzstan. Final Draft.TA 3458 KGZ, September 6, 2000, p. 26.
10
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Grant System
The existing transfer system has some flaws and needs radical reform. For example, the equalization grants
discourage local revenue efforts and stimulate poor expenditure budgeting. Equalization grants should be based on
the economic or poverty indicators for each rayon, and poorer rayons should be provided with larger per capita
grants in compliance with a specific formula.
Shared taxes should be eliminated in the favor of the republican budget, and shared revenues should be replaced by
increased equalization grants and participation grants to stimulate local revenue effort and match the amount that
local governments had collected in prior years.
Budget Reporting and Control
The budgeting process does not meet the goals stated in the budget process laws and in the Constitution. Local
governments are unable to realize self-government due to the imperfection of budget system and its “top-down”
focus. Central government has shifted the burden of local budgets enforcement to oblasts and rayons without
implementing effective controls. Ail okmotus should be responsible for preparing their own budgets approved by the
local keneshes. The budget should be submitted to the Ministry of Finance only for informational purposes, and
local budgetary deficits should not be allowed.
Assignment of Services
Various levels of local governments and state administration are provided by the considerable multi-layering of
responsibilities. Ail okmotus play a large role in the provision of basic schooling, which is a state level
responsibility financed by state categorical grants with local implementation.
3.3. Prospects for Tax Reform Planning and Implementation
Summarizing diverse choices of tax reform strategy, the researches made a conclusion that CITs did not follow
western advice to modernize tax administration and to introduce modern accounting practices, instead focused only
on tax policy. Only recently, reform in tax administration has received high priority and taken central stage in CITs.
The early rapid movements toward comprehensive tax reform and modern tax systems in CEE (Hungary, Czech
Republic, Poland, and Slovenia) and Baltic States (Estonia, Latvia and Lithuania) can be explained by their desire to
join the European Union (EU). Contrast, other CEE countries (Romania, Bulgaria, and Albania) and most of the CIS
countries experienced diverse practices in the implementation of serious tax policy reform in the last half of the
decade. For example, Kazakhstan was the first among the Commonwealth of Independent States (CIS) to introduce
a new modern tax code in 1995,29 followed by Georgia, Uzbekistan, and Tajikistan. 30 On the other hand, Russia is
still lacks an adequate tax system.31
Overall, progress in tax reform varied from country to country and depended on undergoing privatization and other
types of economic reforms. For example, some CEE countries (Poland, Hungary, and Czech Republic) and CIS
(Kazakhstan and Georgia) have formed complicate tax system reintroducing tax holidays and exemptions because of
increased tax competition.
Also, political priority, support of the top authorities and a majority in parliament played a significant role in
reforming of the tax system. In CEE countries and the Baltic States, the wiliness to be part of EU was a catalyst for
reform. Kazakhstan and Georgia have experienced active contributions in technical assistance from foreign advisors.
Although Russia received foreign technical assistance, the new “oligarchs”, the opposition of former communist
party and several regional governments have delayed or blocked reform.
McLure, Charles E., Jr. 1998. “Tax Reform in Kazakstan.” International Bureau for Fiscal Documentation
Bulletin August/September 1998, 375-388.
30
Ebrill, Liam and Oleh Havrylyshyn. 1999. “Tax Reform in the Baltics, Russia, and Other Countries of the Former
Soviet Union.” Occasional Paper 182, International Monetary Fund, Washington D.C
31
Martinez-Vazquez, Jorge and Sally Wallace. 1999. “The Ups and Downs of Comprehensive Tax Reform in
Russia.” Tax Notes International, December 13. 19(24):2261-2273.
29
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Recently, the tax system has achieved noticeable progress in the authorities’ ability to maintain fiscal discipline, in
comprehensiveness and transparency of the budget, and in the identification of some significant areas of quasi-fiscal
liabilities. The strengthened control of the aggregate budget should be translated into the government ability to
reallocate resources effectively from lower to higher prioritized programs. While important aspects of budgetary
control such as offsets and payrolls remain outside the control of central ministries and policy-oriented budgeting
remains limited, government’s use of resources strategically will be significantly reduced. Due to the insufficient
political leadership, perverse institutional set-up and weak coordination between donors and stakeholders, the tax
system of the Kyrgyz Republic is suffering from considerable shortcomings. Thus, the prospects for continuation of
the tax reform planning and implementation are at risk. Additionally, upgrading of the managerial and technical
skills of the public managers has received inadequate attention during the reform implementation process. In order
to overcome these critical issues, the Kyrgyz Republic has made a decision to apply three approaches to support
ongoing public finance reform including the tax reform action plan, a multiyear program of reform strategy and a
shared information pool based on common indicators and coordinated by government and international donors.
According to established framework, the Kyrgyz Government has initiated and developed a concrete action plan for
the tax reform planning and implementation. The action plan will be elaborated further into a roadmap of policy and
operational reforms to sustain and strength tax performance. Also, donors have switched from fragmented approach
of technical assistance to a better coordinated and harmonized support of reform strategy and action plan.
4. Conclusion and Recommendations
In the past two decades the tax reforms in CITs have provided an unprecedented experiment in tax system and
policy design. Although, it is difficult to compare the diverse experiences of different countries, the tax reform
performance of CITs could be measured by three approaches.
The first approach examines compliance of the new tax system with the normative principles of tax theory. 32 The
progress in CIT’s tax system performance includes adoption of the VAT as the main consumption tax, equal
taxation of imported and domestic goods. However, CITs retain numerous tax privileges, deductions and other tax
incentives which significantly distort revenue collections.
The second approach measures the tax reform performance by analyzing the dynamic of CIT’s tax revenues as
percent of GDP and the distribution of tax burdens among income groups. 33 Revenue performance could be affected
by political and economical factors, distribution of resources and be examined by making international comparisons
of revenues as percent of GDP across CITs with similar levels of income or by looking at the balance between
overall revenues and expenditures.34
The third method of measurement the tax reform performance is to look at the very sensitive parameter of
macroeconomic stability, the Foreign Direct Investment (FDI) flows, indicated the reaction of international investor
for the changes in CIT’s tax policy. 35 Lankes and Venables36 have found that the CIT’s reform progress, political
Newbery, David and Nicholas Stern. 1987. “The Theory of Taxation for Developing Countries.” New York:
Oxford University Press.
33
Citrin, Daniel A. and Ashok K. Lahiri, eds. 1995. “Policy Experiences and Issues in the Baltics, Russia, and Other
Countries of the Former Soviet Union.” Occasional Paper #133 (December), International Monetary Fund,
Washington D.C.
Daniel Citrin and Ashok K. Lahiri (eds.), “Policy Experiences and Issues in the Baltics, Russia, and Other
Countries of the Former Soviet Union.” Occasional Paper #133 (December), International Monetary Fund,
Washington D.C
34
European Bank for Reconstruction and Development. 1999. “Transition Report.” London: European Bank for
Reconstruction and Development.
35
Edmiston, Kelly, Shannon Mudd, and Neven Valev. 1999. “How Have Tax Incentives and the Tax Structure
Affected Foreign Direct Investment in the Transition Economies.” Working Paper, Georgia State University,
Atlanta, Georgia.
36
Lankes, Hans-Peter and Anthony J. Venables. 1996. “Foreign Direct Investment in Economic Transition: The
Changing Pattern of Investments.” Economics of Transition, 4 (2), 331-347. October.
32
12
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
stability, and perceived risk are determinants of FDI flows. An unpredictable investment climate and inefficient tax
system can be a major obstacle in attracting and retaining of FDI. 37
As the controlling power over resource mobilization and allocation is taken at the republican level, Kyrgyzstan’s
fiscal system is effectively centralized with elements of deconcentration and local governors appointed by the
President. Local self-government does not have real power to raise resources, allocate public resources, or respond
to the local needs as essential characteristic of a decentralized system.
Government of KR may face three constraints to implement the fiscal decentralization program: local government
capacity to implement the program, ethnic and other conflict, and political or high-level government opposition. It is
important to assess the capacity of local governments to undertake the new duties and obligations. Fiscal
decentralization can help to address ethnic considerations, nationalist aspirations and cultural differences, ensure fair
treatment among religious groups and build the nation. The fiscal decentralization program needs SWOT analysis of
potential stakeholders to overcome opposition and to organize popular support. Fiscal decentralization should begin
with the major cities (Bishkek, Issyk-Kul, Osh, Jalal-Abad, Naryn) and the rayons on a pilot basis.
The challenges emerged from the local tax reform experiment in Kyrgyz Republic are the following.

Serious legislative imperfections. Legislation should clearly define the powers of central and local government
authorities in the context of fiscal decentralization

Lack of any formalized, objective, and transparent criteria for grants distribution and tax allocation norms.
Subjective and human factors have great effect on their distribution.

Incomplete tax and budget legislation reform processes

Lack of official statistical, tax, and budget accountability in the context of local governments.

Low level of staff qualifications at the local level.

Local authorities exhibit no interest in increasing economic development, and effectiveness of tax collection.
The tax policy and administration reforms should integrate the reform of intergovernmental fiscal relations to
increase efficiency and accountability at different levels of government.

According to experience of western countries, the reforming process is correlated with the country’s history and
starting point of tax reform. 38 However, the gap between the philosophy, practices, and institution of tax
systems in centralized and market economies is not overcome.

The effective tax reform should be accompanied by good tax enforcement system and established taxpayers’
culture.39 However, modernization of tax administration and taxpayer compliance issues were the second
priority after reform of tax policy in CIT.
The local tax policy reforms require comprehensive preparation, preliminary education of policymakers and
practitioners, and building consensus for the reform program conducted in a reasonable period of time.
CITs continued to provide special regimes and tax treatment, which lead to complex and instable tax system
with high tax erosion, distortions, taxpayer inequities, increased compliance and administrative costs.
The tax reform is complementary part of institutional and structural reforms which should imply simultaneously
to restructure economy and to create a climate favorable to attract valuable investment.



OECD. 1995c. “Taxation and Foreign Direct Investment: The Experience of the Economies in Transition.” Paris:
OECD.
38
Feldstein, Martin 1976. “On the Theory of Tax Reform.” Journal of Public Economics, JulyAugust 1976 (International Seminar in Public Economic and Tax Theory), 6 (1-2): July-August. 94-97
39
Alm, James. 1996. “What is an ‘Optimal’ Tax System?” National Tax Journal: 49 (1): 117-133.
37
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
The following recommendations to the legislation and the procedure of administration can be made for further local
tax reform in the Kyrgyz Republic:





It is important to develop a strategic plan of comprehensive local tax reform with explicit goals. Implementation
of the plan would require additional investments in the development of data bases and the methodologies to
achieve established objectives and consensus among main stakeholders (policymakers, practitioners, and
taxpayers) and to analyze the potential effects on revenues, resource allocation and tax burden distributions.
Kyrgyz Republic (KR) should continue to simplify the tax system and improvement of horizontal and vertical
equity by reducing or eliminating tax holidays, exemptions, preferences and other tax asymmetries. Also, KR
should reconsider the practice of providing tax preferences to foreign investors as stable and predictable tax
environments is more effective in attracting investments and collecting tax revenue .
Kyrgyz Republic should modernize tax administration, which requires the simplification of tax procedures, the
reduction of compliance costs, and the increasing of spending in training, equipment and taxpayer services.
Minister of Finance and National Bank should discourage the barter and other non-monetary payment methods
and discontinue using the tax offsets.
The tax reform should be accompanied by reforms in supplementary sectors including bankruptcy laws,
international accounting standards, and contracts.
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Exhibits
Exhibit 1. Main Macroeconomic Indicators of the Kyrgyz Republic, 2002-2006
Unit
GDP in Current Prices
Nominal GDP
Per Capita GDP
Agriculture, Hunting,
Forestry and Fishery
Construction
Trade
Transport and communication
Government management
Education
Healthcare and Social
Services
Producer Price Index
Manufacturing
Mining
Hotels and Restaurants
Textile and Clothing
Machinery and Equipments
Electricity and Gas
Labor Market
Employment
Unemployment
Nominal Average Wage
Consumer Price Index
General Government Finance
Revenue
Tax Revenue
Capital Revenue
Grants
Expenditure
Budget Deficit (-),
Surplus( +)
Internal Financing
External Financing
Million KGS
USD
2002
2003
2004
2005
2006
######## ######## ######## ######## ########
317.50
376.41
429.35
472.80
536.00
Million KGS
Million KGS
Million KGS
25929.8
2579.2
10752.9
28199.5
2446.6
12725.4
28215.1
2319.3
15072.5
28739.4
2725.9
18001.6
32761.5
3105.8
21863.2
Million KGS
Million KGS
Million KGS
3845.4
3947.3
2535.1
4514.0
3875.6
3353.8
6045.1
4324.0
3328.1
6617.7
4659.8
3854.4
7036.8
4651.2
4185.2
Million KGS
1298.7
1441.4
1802.0
2064.9
2135.6
103.3
98.5
105.4
92.2
104.9
113.2
109.7
96.5
103.7
115.3
102.5
101.5
110.8
128.1
102.6
106.2
102.2
99.7
104.6
101.4
101.5
92.9
122.9
93.9
117.1
105.9
102.1
100.7
108.0
106.7
Thousands
Thousands
Soms
previous period = 100
1,850.10 1,930.50 1,991.20
265.50
212.30
185.70
1,684.40 1,916.00 2,240.30
102.0
103.1
104.1
2,077.10
183.50
2,612.50
104.3
2,096.10
188.90
3,270.00
105.6
Million KGS
Million KGS
Million KGS
Million KGS
Million KGS
13588.1 15747.9 17620.0
10474.7 11912.0 13980.5
129.5
136.7
224.8
823.6
461.2
715.8
15188.6 16890.6 18841.5
19974.7
16361.4
46.1
392.6
20143.2
24815.3
19981.2
138.0
266.1
25297.8
224.1
-35.2
236.2
-216.5
961.1
-24.9
Previous Period = 100
Previous Period = 100
Previous Period = 100
Previous Period = 100
Previous Period = 100
Previous Period = 100
Million KGS
Million KGS
Million KGS
-776.9
-38.7
815.0
Source: National Statistical Committee of the Kyrgyz Republic.
15
-681.5
-181.6
777.8
-505.8
416.5
301.8
Exhibit 2. Local Expenditures, Revenues and Deficit/Surplus, 1990-2008 (Thousand KGS)
14,000,000.00
400,000.00
300,000.00
12,000,000.00
200,000.00
10,000,000.00
100,000.00
0.00
8,000,000.00
-100,000.00
6,000,000.00
-200,000.00
-300,000.00
4,000,000.00
-400,000.00
2,000,000.00
-500,000.00
0.00
-600,000.00
1990
1991
1992
1993
1994
1995
1996
Local Revenues
Source: National Statistical Committee of the Kyrgyz Republic.
1997
1998
1999
2000
Local Expenditures
2001
2002
2003
2004
2005
Deficit (Surplus)
2006
2007
2008
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Exhibit 3. Local Budget Expenditures, 1990-2008 (% of Total Expenditure)
100%
Nonclassified Expenditure
Other Expenditure
Transport and Communications
80%
Mining and Construction
Agriculture, Water Supply,
Forestry, Fishing and Hunting
Fuel and Energy
60%
Recreation, Culture and
Religion
Housing and Public Utilities
40%
Social Insurance and Protection
Health Care
Education
20%
Internal Security and Public
Order
Defense
General Public Services
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: National Statistical Committee of the Kyrgyz Republic
17
2002
2003
2004
2005
2006
2007
2008
Exhibit 4. Local Revenue Structure, 1990-2008 (Thousand KGS)
13,000,000
12,000,000
11,000,000
10,000,000
Capital Revenue
9,000,000
Tax Revenue
8,000,000
7,000,000
Non-Tax Revenue
6,000,000
Official Transfers
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
1990
1991
1992
1993
1994
1995
1996
1997
Source: National Statistical Committee of the Kyrgyz Republic
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Exhibit 5. Local Tax Revenue, 1990-2008 (Thousand KGS)
1,200,000.00
1,100,000.00
1,000,000.00
900,000.00
Personel Income Tax
800,000.00
Corporate Income/Profit Tax
Property Tax
700,000.00
Business Production Assets Tax
VAT
600,000.00
Retail Sales Tax
Excise Tax
500,000.00
Professional Licenses
Land Tax
Natural Recourses User Charges
Motor Vehicle and Road Taxes
400,000.00
300,000.00
200,000.00
100,000.00
0.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: National Statistical Committee of the Kyrgyz Republic
Exhibit 6. Local Revenues and Tax Revenue to GDP, 1990-2008 (Percentage)
10.00%
140,000,000.00
9.00%
120,000,000.00
8.00%
100,000,000.00
7.00%
6.00%
80,000,000.00
5.00%
60,000,000.00
4.00%
3.00%
40,000,000.00
2.00%
20,000,000.00
1.00%
0.00%
0.00
1990
1991
1992
1993
1994
1995
Local Tax Revenue/GDP (%)
1996
1997
1998
1999
2000
Local Revenue/GDP (%)
Source: National Statistical Committee of the Kyrgyz Republic
2001
2002
2003
2004
2005
Local Tax Revenue
2006
2007
2008
Nominal GDP
Exhibit 7. List of Tax Code Amendments
Bishkek June 26, 1996, # 25
TAX CODE OF THE KYRGYZ REPUBLIC
As amended by the Laws of the Kyrgyz Republic
of December 27, 1996 # 66,
March 18, 1997 # 15,
April 7, 1997 # 20,
December 19, 1997 # 91,
May 26, 1998 # 67,
July 13, 1999 # 69,
July 13, 1999 # 71,
July 16, 1999 # 77,
November 27, 1999 # 130,
December 1, 1999 # 135,
July 17, 2000 # 60,
September 20, 2000 # 76,
March 2, 2001 # 26,
March 12, 2001 # 29,
June 26, 2001 # 59,
July 14, 2001 # 75,
September 27, 2001 # 84,
December 7, 2001 # 105,
December 7, 2001 # 106,
March 20, 2002 # 41,
May 11, 2002 # 79,
January 10, 2003 # 3,
March 8, 2003 # 57,
April 14, 2003 # 73,
April 30, 2003 # 90,
June 14, 2003 # 107,
July 28, 2003 # 155,
August 28, 2003 # 200,
December 18, 2003 # 235,
January 5, 2004 # 1,
January 5, 2004 # 2,
January 5, 2004 # 4
March 25 2004 # 48,
March 25 2004 # 49,
June 11, 2004 # 73,
July 1, 2004 # 82,
July 1 2004 # 83,
September 17 2004 # 167,
September 17 2004 # 168,
September 30 2004 # 71,
February 4 2005 # 14,
February 1 2006 # 32,
June 3 2006 # 89,
July 25 2006 # 128
November 23 2006 # 186
December 29 2006 # 209
April 25, 2007 # 44
Source: DFID GSAC Support Project CNTR 035069. Public Finance Reform. Concerns and Solutions. Diagnostic
Approach, September 2007: p.145.
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Exhibit 8. Administrative Map of the Kyrgyz Republic
Source: Alymkulov, Emil and Kulativ, Murat. Local Government in the Kyrgyz Republic. Developing New Rules in
an Old Environment: Local Governments in Eastern Europe, Caucasus and Central Asia, C h a p t e r 1 0. 2001, p
590.
22
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Exhibit 9. Tax System of the Kyrgyz Republic
Republican Taxes
Personal Income Tax (PIT)
Payers of the Tax
Physical Persons – residents and non-residents of KR, having income
Object of Taxation
Rate of Tax
Legal Foundation
Budget Receipts
Tax Preferences
Income, calculated as the difference between aggregate annual income of the taxpayer and
deductions envisaged by the Tax Code of the KR
10%
Tax Code of KR, Instructions “On the Order of calculation and payment of income tax of
physical persons” (as confirmed by the Resolution of the Government of KR of 03/17/2000
No. 142)
In accordance with the Law of KR “On the republican budget of KR for 2007” is received
to the budget of cities and to the republican budget according to differentiated normative
depending on type of city.
Certain types of income are not subject to tax
Corporate Income Tax (CIT)/ Profit Tax
Payers of the Tax
Object of Taxation
Rate of Tax
Legal Foundation
Budget Receipts
Tax Preferences
Legal entities – residents and nonresidents of KR.
Profit of legal entity, calculated as difference between total annual return of a taxpayer and
deductions, provided for by KR Tax Code.
10%
KR Tax Code, Instruction on “Order of calculation and payment of tax on profits of legal
entities to the budget” (approved by the Resolution of KR Government #142 dated 03/17/2000),
List of enterprises of Kyrgyz community of blind and deaf, taxable by zero rate (approved by
the Resolution of KR Government #576 dated 25.10.1999)
Republican budget, except for taxes, collected in Bishkek and Osh. According to the Law of
KR “On republican budget of KR for 2007” 35% of the tax, collected in those cities goes to
their budgets and 65% to the republican budget.
There individuals, taxable by zero rate, additional deductions for entities, performing charity
activities and exemption of dividends of legal entities-residents from taxation
Interest Tax
Payers of the Tax
Legal entities
Object of Taxation
Interest paid to abovementioned entities
Rate of Tax
10 %
Legal Foundation
Article 108 of KR Tax Code
Budget Receipts
Republican budget, except for taxes, collected in Bishkek and Osh. According to the Law of
KR “On republican budget of KR for 2007” 35% of the tax, collected in those cities goes to
their budgets and 65% to the republican budget.
Not subject to taxation is interest, received by banks-residents of KR or received by them due to
possession of government securities, except for interest, received from leasing agreements.
Tax Preferences
Non-Resident Income Tax
Payers of the Tax
Nonresidents, not connected with permanent establishment in KR
Object of Taxation
Dividends, interest, insurance payments, telecommunication or transportation services in
international communication and transportation between KR and other countries, royalties,
income from provision of services, rent and other income
According to the type of income – from 5 to 30%
Rate of Tax
Legal Foundation
Budget Receipts
Article 109 of the KR Tax Code, section VI of Instruction on “Order of calculation and
payment of profits tax from legal entities to the budget” approved by KR Government
Resolution #142 dated 03/17/2000.
Republican budget, except for taxes, collected in Bishkek and Osh. According to the Law of
KR “On republican budget of KR for 2007” 35% of the tax, collected in those cities goes to
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
their budgets and 65% to the republican budget.
Tax Preferences
None
Value Added Tax
Payers of the Tax
Object of Taxation
Physical persons and legal persons making taxable supplies (except exempt supplies), the total
turnover of which amounts to a sum exceeding 2.5M soms in the course of 12 calendar months.
Taxable supplies and taxable imports of goods, works and services
Rate of Tax
20%; 0%
Legal Foundation
Budget Receipts
The Tax Code of KR; Instructions “On the order of calculation and payment of VAT on taxable
supplies” supported by the Resolution of PKR of 17.03.2000 no.142, Resolution No. 375 of
12.08.96 “On the registration threshold for VAT”.
Republican
Tax Preferences
There are exempt supplies and Taxable Supplies at zero rate
Excise Tax
Payers of the Tax
Object of Taxation
Rate of Tax
Legal Foundation
Budget Receipts
Tax Preferences
Legal entities and individuals (physical persons), engaged in producing and or importing of
excisable goods and gambling industry on the territory of KR
Value of product or physical volume of finished products
According to the product as applied to the value – to 25%, as applied to psychical volume – 0
to1400 som per unit volume
KR Tax Code, Instruction on “Order of calculation and payment of excise tax on goods,
produced in KR” (approved by the resolution of KR Government #142 dated 03/17/2000), KR
Law on “Basic rates of excise tax on excisable goods, imported and produced by legal entities
and physical persons in KR, for 2005” (dated 03/23/2005).
Republican budget, except for taxes, collected in Bishkek and Osh. According to the Law of
KR “On republican budget of KR for 2007” 35% of the tax, collected in those cities goes to
their budgets and 65% to the republican budget.
There are exemptions from tax for some types of excisable goods and for physical persons by
norms of import.
Land Tax
Payers of the Tax
Land user, right of land utilization of which is certified by special document of a standard form
Object of Taxation
Land
Rate of Tax
For agricultural land throughout the republic is 6.6 to 453 som per hectare according to region
and quality (fertility) of soil, for garden plots and summer cottages land plots – 0.04 to 0.16
som per square meter according to type of populated area and for non agricultural land – 0.93 to
2.94 som per square meter.
KR tax Code, Instruction on “Order of calculation and payment of land tax” (approved by KR
Government resolution #142 dated 03/17/2000), Law “On basic rates of land tax for usage of
agricultural land, garden plots and summer cottages land plots, populated area land and non
agricultural land for 2005” (in KR Law edition #235 dated 29th of December 2006)
According to KR Law “On republican budget of KR for 2007” fully collected to local budgets
Legal Foundation
Budget Receipts
Tax Preferences
There are non taxable (partially or fully) types of land and categories of taxpayers exempt from
payment of tax (partially or fully as well)
Emergency Tax
Payers of the Tax
Legal entities
Object of Taxation
According to the type of activity of legal entity – value of realized goods (works, services)
Rate of Tax
1.5%
Legal Foundation
Law on “Fees for prevention and liquidation of extraordinary situations in Kyrgyz Republic”,
Provision “On order of calculation, accounting and application of funds for Emergency tax”
(KR Government Resolution #291 dated 04/26/2004)
Special account of republican budget for execution of works, connected with emergency
Budget Receipts
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Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
situations
Tax Preferences
None
Road Tax
Payers of the Tax
Legal entities
Object of Taxation
Volume of commercial output (gross revenue, works, services) warehouse commodity
circulation, retail turnover
According to the type of activity – 0.08 to 0.8 %
Rate of Tax
Legal Foundation
Budget Receipts
Tax Preferences
Law on “Taxes from enterprises, unions and organizations” #660-XII dated 12/17/1991,
Instruction of KR MF “On order of calculation and payment of road tax” (#291 dated
04/26/2004)
Republican budget
In the paragraph IV of the Instruction of KR MF “On order of calculation and payment of road
tax” there is a list of organizations exempt from payment of tax
Mineral Tax
Payers of the Tax
Enterprises – subsoil users
Object of Taxation
According to the type of mineral deposits – physical volume of extracted mineral deposits or
volume of receipts
According to the type of mineral deposits - 2 to 12%
Rate of Tax
Budget Receipts
KR Government resolution “On fees for exploration and development of mineral deposits”
#198 dated 05/11/1993
Republican budget
Tax Preferences
No
Legal Foundation
Simplified Tax
Payers of the Tax
Object of Taxation
Small businesses with volume of gross receipts less than 3,000,000 (three million) som, except
for subjects:
- that are obliged to or have a right to operate their business
on a patent base
- payers of land tax for using agricultural land
- providing credit, financial, insurance services
- investment funds
- professional participants of the securities market (dealers)
- producing and importing excisable goods
Gross receipts
Rate of Tax
According to the type of activity – 5 to 10%
Legal Foundation
The Law “On simplified taxation system for subjects of small business” (#102 dated
12/7/2001), Instruction “On simplified taxation system for subjects of small business”
(approved by the KR Government resolution #846 dated 12/31/2001)
According to the Law of KR “On republican budget of KR for 2007” fully goes to local
budgets, except for budgets of cities Bishkek and Osh. In these cities 35% of tax collected goes
to their budgets and 65% to the republican budget.
None
Budget Receipts
Tax Preferences
Local Taxes
Resort Tax
Payers of the Tax
Physical persons, arriving at resort places
Object of Taxation
One day spent in health resorts, holiday houses, holiday hotels, hotels or other establishments of
hotel type or one day spent in houses (flats)
Up to 3% from one day fee for staying in health resorts, holiday houses, holiday hotels, hotels
or other establishments of hotel type and up to 10% from amount of estimated indicator
Rate of Tax
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
established by law for one day spent in houses (flats)
Legal Foundation
KR Tax Code, regulatory legal acts of self government bodies
Budget Receipts
Local budget
Tax Preferences
There is a list of individuals, exempt form tax
Advertising Tax
Payers of the Tax
Legal entities and physical persons, providing advertising services
Object of Taxation
The value of provided services
Rate of Tax
Up to 3%
Legal Foundation
KR Tax Code, regulatory legal acts of self government bodies
Budget Receipts
Local budget
Tax Preferences
None
Parking Fee
Payers of the Tax
People parking motor vehicles
Object of Taxation
Parking of cars in places specially equipped or assigned for this purpose
Rate of Tax
Up to 3% from the amount of estimated indicator
Legal Foundation
KR Tax Code, regulatory legal acts of self government bodies
Budget Receipts
Local budget
Tax Preferences
None
Garbage Tax
Payers of the Tax
Physical persons and legal persons as owners of buildings
Object of Taxation
Rate of Tax
Area, attached to the enterprise and the number of workers for legal entities and for psychical
persons it is the size of buildings, number of people living in the house
Up to 25% of calculation index
Legal Foundation
Tax Code of KR; normative legal acts of organs of local authorities
Budget Receipts
Local budget
Tax Preferences
Can be set at the decision of local keneshes
Hotel Tax
Payers of the Tax
Physical persons staying in hotels
Object of Taxation
The value of each day of stay
Rate of Tax
Up to 2%
Legal Foundation
Tax Code of KR; normative legal acts of organs of local authorities
Budget Receipts
Local budget
Tax Preferences
At the determination of local keneshes
Retail Sales Tax
Payers of the Tax
Physical persons and Legal Persons providing paid services to the population and retail sales
Object of Taxation
Value of provided services, retail sales turnover
Rate of Tax
Up to 4%
Legal Foundation
Tax Code of KR, regulatory legal acts of local self-government bodies
Budget Receipts
Local budget
Tax Preferences
None
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Motor Vehicles Tax
Payers of the Tax
Physical Persons owning transport vehicles
Object of Taxation
Per 1 cc of engine capacity
Rate of Tax
Depending on the kind of transport and period of use – from 0,15 to 1,80 soms
Legal Foundation
Tax Code of KR, normative legal acts of organs of local authorities
Budget Receipts
Local budget
Tax Preferences
Certain categories of people are exempt from payment of the tax
Source: Tax Code of the Kyrgyz Republic.
DFID GSAC Support Project CNTR 035069. Public Finance Reform. Concerns and Solutions. Diagnostic
Approach, September 2007: pp. 23-29.
27
Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
Exhibit 10. Local Taxes and Fees in Kyrgyz Republic
1.
Health Resort Tax
2.
Tax on Advertising
3.
Fee Payable by Owners of Dogs
4.
Fee for the Right to Hold Local Auctions and Lotteries, Competitions and Exhibitions for Commercial
Purposes
5.
Parking Permits
6.
Tax for the Right to Use Local Symbolism
7.
Fee on Deals at Exchanges of Commodities and Raw Materials
8.
Fee for Refuse Disposal from the Territory of Built-up Areas
9.
Tax Payable by Persons Growing Flowers in Greenhouses and Selling Them to the Population
10.
Hotel Tax
11.
Tax for the Right to Hunt and Fish
12.
Tax Payable by Tourists Leaving for Countries outside the CIS
13.
Taxation of Video Saloons, Concerts and Shows
14.
Tax on Paid Services to the Population and Retail Sales
15.
Tax on Premises not used for production, trade or social purposes,
16.
Tax Payable by Vehicle Owner
Source: Tax Code of Kyrgyz Republic. Bishkek, June 26, 1996, # 25, Part VIII: Local Taxes and Fees.
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Research Paper
Local Tax Reform in the Kyrgyz Republic
Elima Karalaeva
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