Kyrgyzstan tackles black economy
By Asyl Osmonalieva
BISHKEK - A bill allowing people to declare assets and unpaid tax without fear
of retribution has sailed through the Kyrgyz parliament, after an earlier
version had to be amended because of objections that it would help
money-launderers.
A revised version of the bill was passed on June 25. The legislation, termed
"an amnesty for undeclared taxes and customs duties and legalizing property",
is designed to reduce the amount of business activity that takes place in the
illegal or black economy.
The bill first came before parliament on June 10. Eight days later, the
parliamentary committee on defense, security, law and order and legal reform
sent the bill back to the government for revision. Legislators complained that
it left too many opportunities for people to declare and "legalize" assets
obtained through criminal
activity. That, they argued, would hardly be good for Kyrgyzstan's reputation
abroad.
Presenting the bill to parliament on June 10, the minister for economic
development and trade, Akylbek Japarov, said its aim was to provide
transparency, reduce the black economy, increase investment, incentivize
enterprises to legalize businesses currently run in the grey economy and
determine the origin of capital and property.
Speaking the same day, the deputy minister for economic development and trade,
Aydar Mokenov, said the illegal economy accounted for somewhere between 18% and
60% of the total, depending on how it was calculated. The National Statistics
Committee gives the lower estimate of 18%, whereas the United Nations
Development Programme says it is over 50% and some independent sources put it
as high as 60%.
Along with the new tax code adopted last year, the tax amnesty bill is part of
plans to raise government revenue through improved tax collection.
The law targets individuals and firms that are ready to come clean about
undeclared taxes, customs duties and assets. The economic development ministry
estimates that assets worth US$400 million will come out of the shadows. The
amnesty will be effective from October 1 to December 31.
A previous capital amnesty, launched in 2007, was seen as a complete failure
because businessmen proved reluctant to reveal undeclared assets. For members
of the parliamentary committee reviewing the current bill, the most
controversial issue was a provision exempting businesses from prosecution for
criminal offences such as bribery and extortion for the period up to the end of
2008.
The communists, who are a minority in a parliament dominated by the Ak Jol
party, were particularly vocal in expressing concerns about the exemption and
also about the fact that businesses that joined the amnesty would not have to
undergo tax inspections for the period concerned.
"This law proposes to forgive the all bureaucrats who have stolen property from
the state; we cannot do that because everyone is equal before the law," said
communist leader Iskhak Masaliev. "On the pretext of protecting entrepreneurs,
there's an attempt to legalize corruption among bureaucrats."
The concerns raised by parliamentarians forced the government to revise the law
in several areas, so that the capital amnesty explicitly excludes funds
obtained through money-laundering, abuse of power, the issuing of illegal
contracts and purchase orders, misuse of one's official position, and general
bribery and corruption.
Funds derived from other forms of activity such as illegal dealing in precious
metals and smuggling will, however, be eligible for declaration without
punishment.
Kubanychbek Aydaraliev, head of the economic development ministry's department
for fiscal policy, acknowledged that these areas had been hotly discussed
within government as well as parliament. The amendments would have little
effect on the way the amnesty worked, as the main thrust of the law - getting
people to declare property and unpaid taxes - remained unchanged, he said.
Experts agree the government is right to be doing something about the black
economy since its existence on such a massive scale undermines tax collection,
fuels corruption, and gives rise to a distorted view of the economy as a whole.
Moreover, the bigger players in the black economy are often powerful figures
who use political connections to guarantee they will not be touched. Some are
allegedly part of the organized crime world.
Analysts say the latest attempt to get people to declared capital and unpaid
taxes faces several obstacles - the current economic crisis, recurring
political instability in Kyrgyzstan and the pervasiveness of corruption.
Kemal Izmailov, director of the Institute for Public Policy Research and
Analysis in Bishkek, says the current period of economic slowdown is not the
right time to embark on such initiatives, as hard-pressed businesses have more
incentive than ever to conceal income from the state.
He prescribes a carrot-and-stick approach, saying that in parallel to the
amnesty, government needs to demonstrate that it will be tough on those who get
caught afterwards.
Izmailov believes businesses will take the bait only when they are absolutely
sure that promises of immunity will not be broken later on.
"Businessmen will go for legalization as long as the government gives clear
guarantees that people [who do so] will not be persecuted down the line," he
said.
Nikolai Bailo, a member of parliament from the Communist Party, believes the
success of tax amnesties hinges on a country's political stability.
"In Central Asian countries including Kyrgyzstan, there have always been
problems with political stability, where decisions by the former political
elite get canceled by their successors," he said.
The recent history of Kyrgyzstan, where the long-standing president Askar Akaev
and his administration were ousted in 2005 after a popular uprising, is a
reminder that the people in power and the policies they have approved can
change,
Bailo is skeptical about the outcome of a tax amnesty, as he thinks only a
handful of small and medium businesses will take part, and none of the big
fish.
"We won't catch the financial sharks," he said. "High-ranking bureaucrats
who've built up their capital by committing financial crimes would not want to
risk it."
An expert in political economy, Bazarbay Mambetov, argues that the reverse is
the case, and fears that big business will exploit the amnesty.
"If the bill is passed, a small group of people will simply legalize property
that they have acquired illegally," he said.
Mambetov suspects the current bill resulted from lobbying by businesses that
have acquired public property such as factories in privatization deals of
dubious legality.
At the same time, he said, the government bureaucracy is so riddled with
corruption that if a powerful businessman faces problems for not paying taxes
or other illegal activity, he can always get out of it by handing over a bribe.
Asyl Osmonalieva is an IWPR-trained journalist in Bishkek.
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