Over the last two years, the Government of Tajikistan has made tax reform a priority, principally because it is essential to the country’s goals of boosting private sector development, improving the business climate, expanding export, and creating jobs.
While Tajikistan’s tax revenues have been close to the average for lower-middle-income countries, in the wake of the COVID-19 pandemic, its tax-to-GDP ratio dropped from 23 percent of GDP in 2019 to 20.5 percent of GDP in 2020, reaching the lowest level in the past decade (Figure 1). This, in turn, slowed investments in public services and other national development priorities.
Stable and predictable revenue generation is critical to supporting Tajikistan’s robust development agenda of poverty reduction, social service delivery, and infrastructure upgrade and expansion.
Tajikistan’s National Development Strategy (NDS) sets a target of increasing domestic incomes by up to 3.5 times and reducing poverty by half by 2030. Domestic revenue mobilization remains a top policy priority for the government for achieving its NDS objectives and improving budget sustainability, especially given an already high level of public debt.
To increase tax revenues, Tajikistan is striving to improve the efficiency of tax administration, and as such, since 2013, the country has been receiving support from the World Bank-financed Tax Administration Reform Project.
The project has helped with the modernization of IT infrastructure and systems, and as a result, 40 taxpayer services have become available in electronic format, reducing physical contact between taxpayers and tax officials. The project has also helped establish a taxpayer Contact Center that aims to improve access to taxpayer information and advisory services.
Despite these notable improvements in tax administration, however, Tajikistan has encountered some constraints in expanding efforts aimed at mobilizing domestic revenues. An increasing number of tax exemptions have resulted in substantial revenue loss, estimated between 4 and 11 percent of GDP.
A recent Tax Administration Diagnostic (2019) concluded that the Tax Committee has considerable potential to improve its ability to analyze available data systematically and to identify, quantify, and mitigate compliance risks. This would comprise measures to utilize a structured compliance risk management program, strengthen the dispute resolution system, and focus on the development of tax gap analyses. The assessment noted that the VAT refund and credit system would need to be based on risk assessments and VAT refunds be extended beyond the restricted number of large exporters and diplomatic organizations. Risk-based approaches in audit would need to play a larger role in a more modern tax system.
Another important contributor to Tajikistan’s economic development is the private sector, although foreign private investment has been declining in the recent years and domestic private sector investment accounted to 26.2 percent of the total investment in 2020 (Tajstat). This can be partly attributed to outdated tax policy and approaches to tax collection that have further negatively affected business confidence and incentives to invest and innovate.
A World Bank Taxpayer Trust Survey carried out among 1,060 firms in Tajikistan in early 2021 revealed there is significant scope to enhance voluntary tax compliance by private sector entities, by building trust in the tax system. Those respondents who found it easy to understand the tax system, or to comply with tax obligations expressed more trust in the Tax Committee or their actions (calculating taxes, consistent interpretation of the tax law).
Respondents expressing lower levels of trust were more likely to perceive audits as unplanned or targeted and to appeal the outcome of audits. They also expressed lower satisfaction with e-services. These results suggest that there is significant scope for the Tax Committee to enhance trust, and ultimately compliance, through better targeted and fair audits, and improved facilitation measures.
Unlocking revenue growth potential requires a comprehensive reform of revenue policy and a holistic modernization of tax administration, streamlining the tax system and enhancing quality of taxpayer services to facilitate compliance and support business environment.
Realizing the need for a comprehensive reform, the Government has recently adopted a ‘Tax Administration Development Program for Tajikistan 2020–2025’ focused on improving the business environment, voluntary compliance, and the quality of taxpayer services. Its implementation started with the development of a new Tax Code, aiming to make the tax system less distortionary, simpler, and more transparent to enhance revenue performance and support private sector development.
The World Bank is supporting the Government’s effort of reforming tax policy and administration. On May 28, 2021, the World Bank approved a US$50 million IDA grant to support the reform through a Program-for-Results (PforR) financing instrument to maximize a focus on achieving the results. The project will support elimination of selected tax and customs incentives, improved transparency of tax expenditures, development of secondary legislation to allow for implementation of the new Tax Code, enhancement of taxpayer services based on taxpayer feedback, which are all expected to result in an increased quality of services and level of taxpayer satisfaction.
The project will also support taxpayer education and increased use of risk-based approaches in VAT refunds processing and audit cases selection, which will contribute to the reduction in the VAT compliance tax gap.
The planned tax reform has the potential to be transformative for Tajikistan’s economic development, improving the contribution of the private sector to the economy by addressing major obstacles for doing business, simplifying the tax system and making tax administration more taxpayer friendly.