Tax System

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CHAPTER 4. MOBILIZING DOMESTIC REVENUES
4.1
As seen in Chapter 3, sustained rapid growth of domestic revenue is a central element of Afghanistan’s state-building and reconstruction agenda. International experience suggests that the larger the tax gap (the difference between the taxes actually paid and what should be paid according to existing laws and statutes), the more radical are the changes needed. With a tax gap on the order of 60%, Afghanistan needs to adopt a comprehensive strategy including revamping of the tax administration in order to obtain significant improvements in compliance. Based on the more detailed analysis in Volume III, Chapter 1, this chapter first briefly outlines the key features of Afghanistan’s existing revenue base. It then reviews progress and summarizes key issues in improving revenue policy and strengthening tax administration. The last section presents some illustrative medium-term revenue projections.

A. Revenue Structure
4.2
While in industrialized countries the revenue to GDP ratio is typically around 45-55%, for the least developed countries it is closer to 20%. With revenue at 4.5% of GDP in 2004/05, Afghanistan is an outlier even in this group (Table 4.1). Tax revenues (3.4% of GDP) are only one-fourth the average for low-income countries.

Table 4. 1: Central Government Revenues (% of GDP)
GDP per capita
(USD) 1/

Total
revenue

Total tax
revenue

Afghanistan (FY2004/05 est.)

253

4 .5

3. 4

Sub-Saharan Africa
Asia and Pacific
Low-income countries
Low- middle income countries
Non-OECD average

765
1, 44 7
n/a
n/a
n/a

19.7
16.6
1 8 .0
2 1 .8
n/a

15.9
13.2
1 4 .9
1 5 .8
15.2

Selected countries average
Pakistan
Iran
India
Kazakhstan
Kyrgyz Republic
Azerbaijan
Uganda
Rwanda

n/a
4 20
1,700
470
1,520
290
710
240
n/a

17.4
16.4
20.5
18.5
2 2 .3
19.1
20.5
11.5
1 0 .4

14.8
1 2 .4
8. 6
14.3
1 8 .4
15.0
19.4
10.7
n/a

Country/region

Sources: Government Finance Statistics (IMF); Keen (2004).
Notes: Figures refer to country averages between 1997-2001, where available. For each revenue classification, only countries for which data are available are included. 1/ Country data refers to GNI per capita (World Bank)

4.3
Afghanistan’s economy has many features commonly associated with a low tax base, including: (i) extremely low level of development; (ii) a large informal sector implying a narrow tax base; (iii) the dominance of agriculture which is hard to tax; and (iv) capacity constraints hindering the ability of the Government to collect taxes and of taxpayers to comply with tax regulations. Revenue mobilization is further complicated by the large opium economy that cannot be taxed directly, the need to consolidate Government control throughout the country, and heavy reliance on aid funds that are exempt from taxation. In addition, Afghanistan historically had very low domestic revenue mobilization — in the 1970s the tax to GDP ratio was around 7%, one of the lowest in the world. Afghanistan’s medium-term revenue potential therefore is likely to be toward the lower end of the 11-14% of GDP range. 4.4

Domestic revenues have grown significantly over the last two years, starting from an extremely low base. In 2002/03, they reached $129 million, equivalent to 3.2% of GDP. In 2003/04, revenues reached $208 million (4.5% of GDP), and in 2004/05 they rose to an estimated $269 million, also 4.5% of

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GDP (Table 4.2). The 2005/06 budget projected a modest increase in revenues to $333 million (4.7% of projected GDP).
Table 4. 2: Domestic Revenue Collection
2002/03
Est.
Domestic Revenue (percentage GDP)

2003/04
Est.

2004/05
Est.

2005/06
Budget

3.2

Domestic Revenue ($)

4.5

4 .5

4.7

5,864

Domestic Revenue (Afs)

10,168

12,812

16,150

129

208

2 69

333

Domestic Revenue (percentage shares)
Tax Revenues
Taxes on income, profits and capital gains...
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