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Afghan businesses feel squeeze from govt tax drive

Afghan businesses feel squeeze from govt tax drive

KABUL: new tax regime aimed at weaning Afghanistan off international aid has boosted government revenues but drawn complaints from some private businesses that it hits them unfairly, dampening hopes of economic recovery after decades of war.

Afghanistan’s finance ministry says it expects to raise almost $2.5bn in revenues in the year to March, 2017, $500mn above target, an important achievement as cash for aid and foreign armed forces begins to slow.

The increase in a country plagued by corruption and tax evasion is down to better tax collection rather than a stronger economy, though, and firms say they are being targeted by over-zealous officials whose demands on time and money are preventing them from investing in expansion for the future.

With Islamist insurgents controlling large swathes of territory and appealing to young men to join their ranks, creating jobs is crucial to Afghanistan’s battle against militancy.

“Their only concern is raising a certain amount of revenue. How it’s done is of no concern to them,” said Mustafa Sadiq, whose firm Omaid Bahar Fruit Processing usually employs around 200 staff and double that number at peak times.

“They’re not increasing the volume of business, they’re just increasing taxes on whatever there is left.”

Under rules introduced at the end of 2015, the main business receipts tax rate was doubled from two to 4% and companies must now pay four times a year. Although absolute levels are not high by international standards, compliance imposes a heavy burden for a sector where many had been used to paying no tax at all.

Businesses, many of which learned of the new rules months after they became law, complain of arbitrary and overbearing tax inspectors and say the system is slow, inefficient and open to abuse with some officials demanding bribes for quick clearance.

Already struggling to compete with cheap imports from neighbours Iran and Pakistan, they say the tax drive is stifling the private sector, which saw a 30% decline in new business registrations during the first half of 2016.

Bahar makes juices from apples, grapes and pomegranates, mainstays of the horticultural sector that the government sees as a top development priority. Instead of expanding, Sadiq says he spends much of his time wrangling with inspectors or doing paperwork.

“I personally planned to start two or three small manufacturing businesses but I decided no,” he said.“I haven’t been as disappointed at any time in the past 30 years.”

Economic development in Afghanistan rarely draws the headlines, which are dominated by the ongoing conflict.

Much of the $20bn economy, whose main products, aside from opium, are fruit and carpets, operates informally, paying no taxes. While the government needs revenues, it must try to avoid squashing private enterprise.

“If the government is under pressure, then so is the private sector,” said Fawad Saafi, whose Millifactories group makes products ranging from PVC tubes to foam mattresses.

His workforce has dropped from 700 to under 200 as economic growth stalls and business dries up.