In a statement delivered at the 19th session Consultative Council on Improvement of Investment Climate under the President of Tajikistan, the World bank Country Director Jan-Peter Olters noted yesterday that in a situation, in which the close attention to domestic revenue mobilization is conflicting with the objective of private-sector development, Tajikistan finds itself in an enviable position of a dramatically altered—improved—external environment that holds the key for a solution to the present dilemma.

“Rather than having to focus on the domestic market of nine million, largely low income consumers, Tajikistan’s private sector can now access (for the first time in more than 125 years) neighboring markets with hundreds of millions of frequently underserviced consumers.  In addition, unlike the situation in most countries, there is considerable interest in these markets for goods and services ‘made in Tajikistan’, including energy and food products.  Tajikistan’s economy does not face insufficient demand but is held back by constrained supply.  To access the markets in Central, South, and East Asia and be able to establish markets and commercial ties before regional competitors do, the currently narrow private sector might end up being a distinct comparative advantage.  Rather than having to reform inherited (typically outdated, overstaffed, and uncompetitive) value chains,

“Tajikistan’s principal policy challenge consists of convincing the private sector, domestic and foreign, of the immense opportunity (and inherent profitability) of expanding economic activities—with greenfield investments that ‘import’ modern standards, new technologies, and state-of-the-art equipment. This would make the new industries immediately competitive.

“Against the backdrop of impressive achievements, ambitious development objectives, and rapid geopolitical—as well as technological—changes, Tajikistan is entering a new development phase. Economic policies, which used to be appropriate in the past, are not (or might no longer) be effective in the future. Policy challenges have outgrown the narrow (even if still critical) focus on  state-led public infrastructure to a broader set of socio-economic priorities that the State cannot stem alone.  The key to achieving, concomitantly, the twin policy objectives of increasing urgently needed tax revenues and fostering private-sector development lies in the improvement of State/business relations—with a view to convincing businesses to become more buoyant in their assessment of investment perspectives and Tajikistan’s future as a dynamic, well-governed, export-oriented economy that will provide innovative firms (irrespective of ownership) with considerable, predictable after-tax profit opportunities.

“Consequently, it is income and profit taxes that form the keystone of the overarching social contract between the Government and its citizens, defining an appropriate balance between compulsory payments made to the budget and ‘valued’, productivity-enhancing public goods received from it, whether in terms of improved infrastructure or better access to, and quality of, education and health.  This direct relationship between the State and its citizens fosters increased public accountability vis-à-vis entrepreneurs and employees, students and citizens outside the labor market.

“In this endeavor, Tajikistan can build on (i) principally strong institutions and good capacity; and (ii) important tax reforms implemented in recent years, whether in terms of the adoption of a new tax code in 2013 that reduced the number of taxes, improvements in the infrastructure supporting the electronic filing of tax returns, or the establishment of an appeals committee. It is neither tax policy per se that precludes businesses from being more optimistic and dynamic nor tax administration in general that inhibits progress. While both components, as in most other countries, would benefit from continued modernization, it is misaligned incentives that stand in the way of a breakthrough.

“If personal and institutional remunerations, including bonuses paid, are linked to the explicit objective of ‘meeting revenue targets’, disaggregated to the micro level, effective tax collection efforts (i) weaken the link to the tax laws that were meant to define the relations with the private sector; (ii) increase businesses’ insecurity and risk perceptions over effective tax obligations, thereby adding disincentives to investments, innovation, and expansion; and (iii) discourage businesses’ willingness to comply voluntarily with tax obligations, hence fostering tax evasion and informality.

“This policy challenge has contributed to dynamics that impede efforts to reach the twin objectives of ensuring sufficient budgetary revenues and fostering private-sector development.  The more unpredictable tax collection becomes for businesses, the less forthcoming they are vis-à-vis the Tax Committee, adding to its difficulty of meeting said tax collection targets. On the one hand, this leads to increased tax audits, penalties, and tax pre-payment requests, which constrain even further entrepreneurial initiatives.  On the other one, in parallel efforts to encourage private-sector activities, Tajikistan has tended to offer generous tax incentives and tax exemptions, with high costs to the budget but limited effects on additional direct investments, new technologies, and/or accelerated employment generation (the three principal reasons for a government to relieve businesses from respective tax obligations).  The tax/business dynamics and policy responses are mutually reinforcing—to the detriment of Tajikistan’s overarching development objectives and at the risk of missing the country’s historic export opportunities.

“In short, aligning incentives as central plank in the modernization of Tajikistan’s tax regime is the key to ensuring that the country’s ambitious development objectives can be realized, in full and in time.  The State needs the private sector to be able to compete successfully in and beyond the large neighboring markets, it needs profitable firms to be able to create additional employment and increase income security for its citizen. And the State budget needs a growing private sector to broaden the tax base, foster voluntary tax compliance, and—ultimately—increase budgetary revenues required for highest-priority public investments in infrastructure and human capital. At present, the window of opportunity is wide open for courageous steps with which to ensure socioeconomic transformation and higher standards of living.  This window will, however, not stay open forever.  Competition from neighbors in these markets is growing.  The members of the DCC, generally, and the World Bank Group, specifically, should like to take advantage of this occasion to reconfirm support, if requested, to policies with which to reverse the currently adverse interplay between domestic revenue mobilization and private-sector development and re-align incentives to the benefit of citizens, enterprises, and the budget.”