Reforms in Review Part 3: Revenue Collection and Tax Reform

Special thanks to Abdul Habib Zadran, Director General of the Afghanistan Revenue Department at the Ministry of Finance, for his contributions to this article.

The increase in revenue collection from domestic sources has been a particularly successful undertaking of the National Unity Government, especially in light of the continuing conflict. Total revenue collection in 1395 (2016) was 147 billion Afghanis (Afs) compared to 122.4 billion Afs in 1394 (2015), an increase of 20 per cent.[1] The Ministry exceeded its revenue collection goal for 2017 by 16.6 billion Afs increasing the revenue by nearly 14% since 2016.

There are many reasons for the increased revenue collection, including standard fiscal fluctuations such as inflation, exchange rate depreciation, and real growth of the economy,[2] but also direct efforts by the Ministry of Finance to implement reforms, increase public awareness and customer services for taxpayers, and implement systems of transparency to stop leakages due to corruption.

 The Afghanistan Revenue Department (ARD), housed within the Ministry of Finance, is responsible for the administration and collection of tax and non-tax revenue for the Afghan government, and has implemented the revenue and tax collection reforms.  These efforts include a wide range of reforms and restructuring within the ARD, particularly the roll out of SIGTAS, fast-track filing and e-forms, legal revisions, and the segmentation of taxpayers offices into Large, Medium and Small.

Tax Administrative Reforms

Most of the quick revenue increase is due to a number of administrative reforms in the ARD.   These helped jump-start revenue increase, while more time-consuming reforms were underway.  Some those specific efforts include:

 One barrier to paying taxes was simply the complexity and opaqueness of the tax-paying process. To address this, the ARD launched a fast-track filing system for the Large Tax Payers office in August 2017 in order to  expedite filing and cut out three in-person visits that were previously required to file taxes. This system is a modified version of an official e-filing system, which is pending until the endorsement of an e-governance law in the country.  Similarly, e-forms have been launched for all medium and small taxpayers, which can be accessed and downloaded from the ARD website. To utilize the system, taxpayers must acquire a Tax Identification Number (TIN) to file Corporate Income Tax, Personal Income Tax, Withholding Taxes, Fixed Taxes, Business Receipt Tax and other taxes. The procedure for issuing the tax clearance certificate, which is needed for the renewal of business licenses, has also been simplified and tax clearance can be obtained much quicker than in previous years.

 When the tax records were thoroughly reviewed, it became apparent that many taxpayers, predominantly businesses, had not paid taxes for years. There was also a lack of clarity and public awareness on penalties for late payments, late filings, and tax concealment, thus many businesses had accumulated a backlog of high penalties. The Ministry of Finance addressed this issue in consultation with Parliament and reached a solution to implement a temporary amnesty on penalties, which was introduced in last year’s budget. Under the amnesty initiative, all backlogged tax penalties were exempted to 95%, so tax payers who had outstanding liabilities and accumulated penalties could clear them by paying just 5% of accumulated penalties, in addition to the principal amount of tax originally owed. The initiative is still ongoing and taxpayers have 9 months in total starting with the current fiscal year to take advantage of this amnesty.

 Policy and Legislative Reforms

There have also been a number of policy and legislative reforms addressed to encourage taxpayers and simplify the process for them:

 These reforms were specifically benchmarked in agreements with donors to the Afghanistan Reconstruction Trust Fund via the World Bank. Upon achievement of these benchmarks, the Ministry of Finance received 65 million dollar grant from donors to the Afghanistan Reconstruction Trust Fund (ARTF).

 Increasing Public Awareness and Tax Payer Customer Service

Because the Afghan government had not made efforts previously to engage citizens in the tax-paying process and their tax-paying obligations, the ARD undertook a massive national public awareness campaign, via TV and radio commercials, social media, and face-to-face meetings with the Afghan Chamber of Commerce, private sector and civil society, and business, in addition to revamping and updating the ARD website.

 For the past two years, the ARD celebrated the first week of the fiscal year as Tax Awareness week, reaching an estimated 12,000 taxpayers directly across the country through public engagement initiatives including distribution of promotional materials, seminars, sports events, university lectures, and increased media appearances by provincial directors.

 As the number of tax-paying citizens increases, the ARD has taken steps to improve customer services. The Large, Medium and Small Taxpayers Offices all include customer service centers. A complaints and questions hotline was established, so taxpayers can get their questions answered by calling ‘1000.’  Fast-track filing services were launched for the Large Taxpayers Office in 2017, and in 2018, similar services will be launched for the Medium and Small Taxpayers offices, as well as customer service centers for small taxpayers in the provinces.

 There have also been efforts to clarify and communicate personal income tax obligations. Those citizens who make less than 5,000 Afs a month are totally exempt from paying taxes. Those who make between 5,000 to 12,500 Afs a month are required to pay only 2% tax. Income between 12,500 Afs to 100,000 Afs triggers 10% tax, plus 150 Afs fixed amount. The fixed amount increases to 8,900 Afs and the tax increases to 20% as monthly income exceeds 100,000 Afs. Most large taxpayers pay taxes via bank transfer, while medium and small taxpayers, and taxpayers throughout the provinces, make a manual deposit at a branch of Da Afghanistan Bank in Kabul or in the provinces.

 A similar arrangements exists for small businesses and small commercial shops.  Previously, small shopkeepers were exempt from paying taxes if their income was less than 60,000 Afs a year, but now that threshold has been increased to 150,000 Afs. Other factors are considered as well, including risks, and amount of expenses. Shopkeepers are provided information on how to appeal against the ARD assessment if they feel they have been unfairly taxed. An Automatic Tax Calculator App has been introduced for the small taxpayer, so that they can easily estimate their tax liabilities to avoid any misuse of the taxpayer’s low awareness level.

 Cutting corruption and creating incentives

Another reason for the increase in revenue over the past four years has been due simply to stopping the hemorrhaging of revenue due to corruption.  Several changes in human resources and technical systems at all levels of the ARD and Customs department have resulted in plugging these leakages.

 The SIGTAS (Standard Integrated Government Tax Administration System) automated tax collection system is now being implemented within the ARD at all points where taxes are collected in Kabul, as well as in Herat, Balkh, Kandahar, Kunduz and Nangarhar. Further automation and process simplification continues, creating more resistance to corruption.

 An HR review of the 2,400 staff working in the ARD across the country exposed corrupt factors and low performing employees working in the department—142 internal staffing changes have been made with their aim of reducing opportunities for corruption and increasing administrative efficiency. Extremely low civil servant salaries in the ARD were further exacerbating corruption—civil servant salaries were raised for staff in the LTO last year which yielded positive results in staff performance, and a proposal has been put forth to do the same in the ARD and throughout the taxpayers offices.

 The ARD has also worked hard to incentivize paying taxes and create a culture of fulfilling taxpaying obligations. Last year, the ARD awarded those tax payers in the LTO who complied with processes on time and accurately—awardees included AWCC, one of the largest telecoms providers in Afghanistan, and the airline Kam Air. For 2018, the ceremony will be hosted in the Office of the President and will include taxpayers from the provinces.

 Next Steps in tax reform

The results of these reform efforts at ARD were recognized in 2016, when the department was awarded as the second highest-performing fiscal directorate in the Afghan government, just behind the National Procurement Authority which ranked first place.

 But there is still much work to be done to ensure that systems are fluid and accessible to all, that system automation and fast-track filing services are expanded, and that as the tax base increases, customer services also increases and improves. This will be the focus in 2018.

 Construction on the new taxpayer center for the LTO in Kabul started 4 months ago and is expected to be completed before the end of the year. By 2020, two further centers for Medium and Small Taxpayers will be constructed in Kabul. Small taxpayers offices are planned to be established in district centers around the country within two years, with the first 5 completed in various districts of Kabul city by the end of this year.  Such centers will operate in a professional environment to provide one window services to the taxpayers and will reduce interaction between the employees and the taxpayers, thus will significantly reduce the opportunities for corruption.

 Legislative reforms will continue as well. In accordance with the government’s agreements with the International Monetary Fund and the World Bank, the Value Added Tax law is now approved and slated to start implementation in 21 December 2020, with a standard rate of 10%. VAT is a key fiscal sustainability measure foreseen in Afghanistan’s IMF Extended Credit Facility and in Afghanistan’s EU State-Building Contract.  Given the scale, complexity and nature of introducing VAT, ARD has developed a VAT implementation plan and a national Large Taxpayers office reform plan to ensure a smooth transition in implementing collection of this new tax. In addition, VAT communication and VAT transition plans have been developed and shared on the ARD website.  Based on government and IMF calculations, a 10% VAT is expected to yield an additional revenue of 2 per cent of GDP.

 A fully functional e-filing system will be implemented as soon as the e-governance Law is approved. Recently, the taxpayers service center for Medium Taxpayers in Kabul was upgraded with technological equipment to manage the queue system and to send automatic notifications to taxpayers.

 2018 revenue targets

The revenue collection targets for 2018 have been established—IMF target is set at 172 billion Afs; and the target set by the Ministry of Finance is 187.3 billion Afs.

[1] 2018 National Budget document

[2] Improving Afghanistan’s Public Finances in 2016-2017: Raising Revenue and Reforming the Budget, William Byrd and Shah Zaman Farahi, April 2018.