Tax incentives to facilitate achieving SDGs in Kyrgyzstan
August 3, 2022
We spoke with the Head of the Fiscal Policy Department of the Ministry of Economy of the Kyrgyz Republic Mr. Kubanychbek Ysabekov to learn more about the priorities of the Cabinet of Ministers of the Kyrgyz Republic in achieving the Sustainable Development Goals through the implementation of the Integrated National Financing Framework and tax incentives.
The Sustainable Development Goals (SDGs) are consonant with the goals of the National Development Strategy of the Kyrgyz Republic for 2018-2040 and are aimed at developing human capital and innovation in harmony with the environment. SDGs are included in the main strategic documents of the country, in the National Development Strategy 2040 and the National Development Program of the Kyrgyz Republic until 2026. The conceptual idea of the state policy of Kyrgyzstan is to focus on improving the well-being of citizens by creating an environment for the socio-economic development of the country, implementing anti-crisis measures and laying the foundations for successfully achieving long-term sustainable development goals. In addition, the National Development Program within the framework of the fiscal system reform reflects the main directions of tax policy, including tax incentives, which should become one of the effective tools of the Cabinet of Ministers of the Kyrgyz Republic in achieving national development priorities and the SDGs.
UNDP assists the Cabinet of Ministers of the Kyrgyz Republic in implementing development reforms and supports the achievement of the internationally agreed SDGs, including through the creation of the Integrated National Financing Framework, which helps the Cabinet of Ministers of the Kyrgyz Republic accelerate the implementation of development plans by streamlining the system of tax incentives. This initiative will help Kyrgyzstan set new sources of funding and pool public and private resources to finance the country's development priorities.
Tax incentives and why are they important for Kyrgyzstan?
In 2022, Kyrgyzstan adopted a new Tax Code to improve the efficiency of the use of public funds and control their compliance with the country's development priorities, which has a requirement to regularly evaluate the efficiency of tax incentives. This approach will allow the authorities to regularly evaluate the effectiveness of each tax incentive and make appropriate and timely decisions on their relevance or their cancellation. This, in turn, will allow the Cabinet of Ministers of the Kyrgyz Republic to receive more revenue to finance the priorities of the National Development Strategy and introduce new tax incentives that could attract private investment in the country's sustainable development priorities. In this connection, when developing a draft new edition of the Tax Code of the Kyrgyz Republic, it was planned to consider the issue of abolishing certain tax incentives and setting deadlines for certain incentives. Because previously the tax benefits had no expiration date.
«Today, in the Kyrgyz Republic, incentives are provided both to support the development of a certain sector of the economy, and certain categories of taxpayers. There are also incentives that have the same effect on all taxpayers: in particular, standard income tax deductions or income tax-deductible expenses, as well as a zero VAT rate for export deliveries. Some incentives, in fact, lead to budget losses and, on the other hand, taxpayer savings only for a temporary period. The consequences of the presence of tax incentives are not only direct budget losses, but also the complexity of administration, as well as the creation of additional opportunities for tax evasion, - explains Mr. Kubanychbek Ysabekov - Tax incentives and preferences should be assessed from the position of "output" & "result", which means the presence, firstly, of strictly defined parameters, to which the efforts of the state are directed and, secondly, an assessment of the effectiveness of the established privileges, which reflects the achievement of the set goals. However, at present, not all of the incentives presented are effective and do not reflect the goals set. In this regard, to improve the efficiency of providing tax incentives, which will comply with the priorities of the national development strategy, UNDP supported the Ministry of Economy and Commerce (MEC) within the framework of the INFF project».
The creation of a comprehensive system for assessing tax incentives, which is aimed at achieving the priorities of the National Development Strategy of the country, will make it possible to coordinate the provision of incentives only to those types of economic activities that are relevant to the priorities of the country's sustainable development.
Emphasizing the main achievements of this work, Mr. Kubanychbek Ysabekov pointed out that the new version of the Tax Code contains a norm that creates a system for conducting regular assessments of the effectiveness of tax incentives. Thus, according to Art. 14 of the Tax Code of the Kyrgyz Republic Tax incentives are provided for the following purposes:
- promoting sustainable development of the economy of the Kyrgyz Republic
- attracting o investments and financing for the priority sectors of the economy for sustainable development
- achieving the main priorities of the National Development Strategy of the country
- social support of the population
- encouraging socially useful (including charitable) activities
What is the relationship between tax incentives, INFF and the SDGs?
To improve the efficiency of providing tax incentives, the Ministry of Economy and Commerce of the Kyrgyz Republic in partnership with UNDP conducted assessment of the effectiveness of tax incentives and analyzing the tax incentives, exemptions and preferences provided in 2016-2020 for their impact on the achievement of the SDGs. The initiative was carried out within the framework of the INFF activities.
«An analysis of the presented tax incentives, exemptions and preferences for the 2016-2020 revealed that, for example, 40% of the incentives were aimed at achieving SDG 8, which stands for decent work and economic growth; 33% of the benefits went for SDG 1, the elimination of poverty. This demonstrates the efforts of the Cabinet of Ministers of the Kyrgyz Republic to ensure economic growth and reduce poverty by providing tax incentives to achieve these SDGs. Healthcare (SDG 3) and industrial development (SDG 9) received about 9% and 8% of the incentives, respectively. Health benefits (SDG 3) have been significantly increased in 2020 due to the COVID-19 outbreak. Other SDGs received less than 11% of benefits during the reviewed period», - Mr. Kubanychbek Ysabekovexplained.
How can tax incentives help achieve the SDGs?
The provision of tax incentives is one of the tools that contribute to the achievement of the SDGs. They are one of the main instruments of implementation, regulating and stimulating the functions of taxation, where the state actively participates in redistribution processes, influences reproduction, stimulating or restraining its pace, strengthening, or weakening the accumulation of capital, expanding, or reducing the effective demand of the population. In addition, tax incentives can have an impact on the development of production, the improvement of its industries and territorial structure, the creation of the necessary infrastructure facilities and the promotion of foreign investment.
«Today, in the Kyrgyz Republic, incentives are provided both to support the development of a certain sector of the economy, and certain categories of taxpayers. At the end of 2020, tax incentives and exemptions provided for by the Tax Legislation amounted to an estimated 32.3 billion KGS or 5.4% of GDP. Which is a significant amount and therefore, the issue of improving the effectiveness of benefits is an important issue. The analysis showed that in 2020 the amount of tax incentives provided to facilitate the financing of the SDGs was 32,073.5 million KGS, while, from 2016 to 2020 this amount was 132,723.9 million KGS. The provided tax incentives and exemptions, in accordance with the Tax Code of the Kyrgyz Republic, cover 13 goals (out of 17) in the field of sustainable development. For 2016-2020, the share of tax incentives aligned with the SDGs from total tax incentives and exemptions provided under the Kyrgyz Republic's Tax Code averages 99.1%» - says Mr. Kubanychbek Ysabekov.
This means that the tax incentives reflected in SDG 13 include increasing the income of the population, ensuring food security, providing the population with clean water and electricity, supporting the agricultural sector and producers, reducing the informal sector, providing the population with opportunities for decent work and education, protection of public health, protection of its vulnerable categories, active participation of citizens in cultural life, etc. Thus, the stated objectives of a significant portion of the tax incentives granted are in line with the SDGs.
According to Mr. Kubanychbek Ysabekov, the methodology for assessing tax incentives, which is now being finalized, will make it possible to regularly assess the effectiveness of tax incentives in accordance with the sustainable development principles, stipulated in the Tax Code of the Kyrgyz Republic.
These activities are carried out under the Integrated National Financing Framework financed by the United Nations Joint Fund for SDGs and jointly implemented by UNDP and UNICEF. This partnership is a continuation of the constant support of the Cabinet of Ministers of the Kyrgyz Republic by the UN in the implementation of the global 2030 Agenda for Sustainable Development.
The complete information on tax incentives including the table with the tax incentives assigned to SDGs in Kyrgyzstan over the past five years can be found in our publication.
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