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Business Environment in Tajikistan as Seen by Small and Medium Enterprises December 2009

Investment Climate Advisory Services I World Bank Group

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The contents of this report are protected by copyright. Neither this report nor its parts may be reproduced, copied or distributed in any form without reference to the IFC survey report Business Environment in Tajikistan as Seen by Small and Medium Enterprises. IFC encourages dissemination of this publication and hereby grants permission to the user of this work to copy portions of it for the user’s personal, noncommercial use, without any right to resell, redistribute, or create works derived from the contents or information contained herein. Any other copying or use of this work requires the express written permission of IFC. The materials contained in this report are presented as an overview of results from the survey that was conducted in July – October 2008 among managers of Tajik small and medium companies, individual entrepreneurs, and dehkan farms. The information in this report is presented in good faith for general information purposes, and IFC, the World Bank Group, the Swiss State Secretariat for Economic Affairs (SECO) or the Department for International Development of the United Kingdom (DFID) shall not be held liable for any of the information contained herein. This report does not claim to serve as an exhaustive presentation of the issues discussed herein, and should not be used as a basis for making commercial decisions. Please approach independent legal counsel for expert advice on all legal issues. All information and materials used in preparing this report are the property of and archived by IFC. Š 2009 International Finance Corporation The report is available, in printed and electronic form, at the following address: IFC Business Enabling Environment Project 7, Abdullo Komandir Street Dushanbe, 734001 Tajikistan www.ifc.org/tajikistan/sme


Business Environment in Tajikistan as Seen by Small and Medium Enterprises December 2009

Investment Climate Advisory Services I World Bank Group

In partnership with:


Table of Contents

TABLE OF CONTENTS Glossary ....................................................................................................................................................... 7 Foreword and Acknowledgements ........................................................................................................ 9 Executive Summary ...................................................................................................................................11 Chapter 1 - SMEs in Tajikistan - Overview of the Sector, Main Trends and Business Expectations ............................................................................................ 19 1.1 - Tajikistan’s macroeconomic environment remains challenging ............................. 20 1.2 - The SME sector is the major employer in Tajikistan .............................................................. 23 1.3 - Individual Entrepreneur revenues are increasing ............................................................... 26 1.4 - Small and medium companies are not growing ................................................................ 29 1.5 - Dehkan farm revenues are falling ............................................................................................ 33 1.6 - Despite some signs of optimism, investments across SME sector continue to fall .. 35 Chapter 2 - REGISTRATION ......................................................................................................................... 37 2.1 - Legal Framework: Registration Procedures Vary by Legal Form ............................... 39 2.2 - Registration of Individual Entrepreneurs Starts with Choice of Patent or Certificate .................................................................................................................................... 40 2.3 - Registration of Legal Entities (Small and Medium Companies) Is Complicated and Confusing .................................................................................................. 46 2.4 - Registration of Dehkan Farms Is Dependent on the Local Land Committee ............... 55 2.5 - Recommended Policy Options: Simplified registration procedures ............................. 58 Recommendations ..................................................................................................................................... 60 Chapter 3 - Licensing .................................................................................................................................... 63 3.1 - LEGAL FRAMEWORK: ROOM FOR FURTHER IMPROVEMENT ........................................................... 65 3.2 - SURVEY FINDINGS: LICENSING IMPOSES GREATER COSTS TO SMEs IN 2007 THAN IN 2005 ......... 69 3.3 - RECOMMENDED POLICY OPTIONS: SILENCE IS CONSENT AND SELF-CERTIFICATION .................. 79 Recommendations ..................................................................................................................................... 80 Chapter 4 - PERMITS ......................................................................................................................................... 85 4.1 - LEGAL FRAMEWORK: VAGUE AND CONFUSING .............................................................................. 87 4.2 - SURVEY FINDINGS: FEWER SMEs RECEIVE PERMITS, BUT THEY PAY MORE FOR THEM .................... 91 4.3 - PROSPECTS FOR REFORM: THE “GUILLOTINE” APPROACH ............................................................ 103 Recommendations ................................................................................................................................... 106

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Table of Contents

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Chapter 5 - Access to finance ........................................................................................................... 113 5.1 - Context: Tajikistan’s Financial System is Underdeveloped ............................................ 115 5.2 - key survey findings: Access for finance is improving, but slowly ............................ 120 5.3 - Suggested directions for reform: Credit bureau and expanded leasing ................ 136 Recommendation .............................................................................................................................. 137 Chapter 6 - INSPECTIONS ......................................................................................................................... 139 6.1 - CONTEXT: INSPECTIONS ..................................................................................................................... 141 6.2 - KEY FINDINGS: INSPECTIONS ARE LESS OF A BURDEN IN 2007 THAN IN 2005 FOR MOST OF THE SME SECTOR ................................................................................................... 149 6.3 - Directions for reform: Use Risk-Based Inspections to optimize government resources ............................................................................................................. 169 Recommendation ............................................................................................................................. 172 Chapter 7 - TAXATION .............................................................................................................................. 181 7.1 - CURRENT TAX SYSTEM IN TAJIKISTAN - CONTEXT ......................................................................... 184 7.2 - TAXATION OF INDIVIDUAL ENTREPRENEURS ................................................................................ 192 7.3 - TAXATION OF SMALL AND MEDIUM COMPANIES ...................................................................... 200 7.4 - TAXATION OF DEHKAN FARMS .................................................................................................... 204 7.5 - TAX ADMINISTRATION .................................................................................................................... 207 7.6 - DIRECTIONS FOR REFORM: RISK-BASED AUDIT ............................................................................ 210 recommendation ............................................................................................................................. 212 Chapter 8 - Foreign trade and technical regulation ............................................................... 217 8.1 - Context: Multiple Obstacles Related to Foreign Trade and Technical Regulation ..................................................................................................... 220 8.2 - Role of SMEs in foreign trade: key survey findings ....................................................... 231 8.3 - Certification and SMEs: key survey findings .................................................................... 233 8.4 - Directions for reform of foreign trade procedures ................................................. 238 Recommendation .............................................................................................................................. 240 Chapter 9 - Methodology ................................................................................................................... 243 Annex A - Additional Survey Data on Tajikistan’s SME Sector ................................................. 255 ANNEX B - Sample methodology ........................................................................................................ 265 References ...................................................................................................................................................... 289

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Table of Contents


Glossary

Glossary ACTED Agency for Technical Cooperation and Development ADB Asian Development Bank AML/CFT Anti-money laundering / combating the financing of terrorism CIS Commonwealth of Independent States DRS A Districts of Republican Subordination – Hissar Valley DRS B Districts of Republican Subordination – Rasht Valley DRS Districts of Republican Subordination ECA Eastern Europe and Central Asia ETDS Electronic trade declaration system EU European Union FDI Foreign direct investment FEZ Free economic zone GBAO Gorno-Badakhshan Autonomous Oblast GDP Gross domestic product GTZ German Agency for Technical Cooperation IFC International Finance Corporation IMF International Monetary Fund ISO International Organization for Standardization KI KreditInvest MDO Microcredit deposit-taking organization MEDT Ministry of Economic Development and Trade (Government of Tajikistan) METR Marginal effective tax rate MFA Ministry of Foreign Affairs (Government of Tajikistan) MFO Microfinance organization MSDSP Mountain Societies Development Support Programme NBT National Bank of Tajikistan OECD Organisation for Economic Co-operation and Development OSCE Organization for Security and Co-operation in Europe SECO Swiss State Secretariat for Economic Affairs SES Sanitary and Epidemiological Service (Government of Tajikistan) SME Small and medium enterprise SPS Sanitary and phytosanitary standards TBTs Technical barriers to trade TJS Tajik somoni TRiPS Trade related intellectual property TUCE Tajikistan Universal Commodity Exchange UNDP United Nations Development Program US United States VAT Value Added Tax WIS Wakefield Inspection Services WTO World Trade Organization

Tajik Somoni to US dollar exchange rates used in the report (NBT rates): Average exchange rate for 2002: Average exchange rate for 2005: Exchange rate on December 31, 2007:

$1=3.00 somoni $1=3.19 somoni $1=3.465 somoni

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Glossary

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreword and Acknowledgements


Foreword and Acknowledgements

Foreword and Acknowledgements IFC, with the support of the Swiss State Secretariat for Economic Affairs (SECO) and the Department for International Development of the United Kingdom (DFID), presents the results of the 3rd survey of the business environment in Tajikistan. The survey has been undertaken by IFC’s Tajikistan Business Enabling Environment Project. The objective of this survey was to assess the existing conditions for doing business in Tajikistan in 2007 and to develop recommendations for improving them. This report is based on the results of a survey of managers of about 1,500 small and medium enterprises (SMEs), conducted in July -- October 2008, representing all regions and four key sectors of the economy. Besides small and medium companies, the survey also included the sub-populations of individual entrepreneurs and dehkan farms in Tajikistan. Detailed information on the realities of the business enabling environment that are faced by these three segments of the population is presented here; it is hoped that the empirical data from this survey will be used by various stakeholders to stimulate the business environment and make administrative procedures more efficient and transparent. During the six years since its launch, the IFC Tajikistan Business Enabling Environment Project has benefited from close interaction with many public and private institutions operating in Tajikistan, as well as a number of international organizations. The project would like to thank the government of Tajikistan, with whom the project signed a Memorandum of Understanding most recently in November 2006. The project would also like to extend gratitude to the Executive Unit under the Office of the President of Tajikistan and the State Committee on Investment and State Property Management, with which it developed a longstanding relationship, and to the Tax Committee, which has been a vital partner during the most recent phases of the project’s work. Numerous individuals and organizations contributed generously to the preliminary review of this report, including the World Bank (Andrea Dall’Olio, Brett Coleman, Souleymane Coulibaly, Simone Giger, Davronjon Okhunjonov, Munawer Khwaja, Utkir Umarov), IFC (Lars Grava, Jan Loeprik, Sanjukta Mukherjee, Florentin Blanc, Christopher Miller, Ana Marina, Zarina Odinaeva, Craig Bell and the Belarus BEE team, Sanjar Ibragimov and the Ukraine BEE team), IMF (Luc Moers), Bearing Point (Rup Khadka), Pragma (Nurali Shukurov), WYG International (Arthur Luke), Finca (Paul Hamlin), the Association of Microfinance Organizations of Tajikistan (Erika Buerkle), Ideas (Matthias Meyer), GTZ (Khushnidjon Rasulov), and TSG (Jovan Jekic). Dushanbe, 2009

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreword and Acknowledgements

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary


Executive Summary

IFC Survey of the Business Environment in Tajikistan as seen by SMEs Executive Summary The IFC SME Survey seeks to identify exactly what barriers Tajik small and medium enterprises (SMEs) encounter, in an effort to identify which reforms are most urgent. In this survey, IFC has collected and analyzed the views of 1,500 Tajik SMEs on a number of administrative procedures which they encountered either in establishing or running their businesses in 2007.1 This report is a follow-up to the first and second surveys of the business environment in Tajikistan conducted by IFC in 2003 and 2006. The survey collects data on the business environment as seen by respondents from a nationally representative sample of businesses. This report presents the survey findings and incorporates background information on the policy, legal and regulatory frameworks currently in place. Included in the report are recommendations to policymakers, based on analysis of both the regulatory framework and the survey results. The IFC SME Survey results presented here show several improvements since 2002 in the business environment facing SMEs in Tajikistan, particularly in the frequency of inspections, the time to register a business, and the validity period of the average license.2 Implementation of the 2006 Inspections Law saved the SME sector in Tajikistan a total of $9.3 million over a one-year period.3 This is a strong positive result from legal reform and the government’s implementation efforts in inspections. Other administrative procedures are also ripe for reform and can yield economic benefits in reduced administrative costs for businesses. The average small and medium company in Tajikistan spends 26.7% of profits on the four most common administrative procedures, considering only direct costs (see table 1). This translates to $18.2 million in direct costs for small and medium companies and for individual entrepreneurs of licensing, permits, certificates, and inspections.4 This figure should be seen as only part of the cost of regulation in Tajikistan for individual entrepreneurs and small and medium companies. It excludes, for example, the preparation and filing of tax returns. Also, the analysis above does not consider the amount of employee time dedicated to each procedure or the value of lost profits when a firm remains idle on account of the procedure. Cutting the time and cost of administrative procedures can translate to a direct monetary benefit for firms. Table 1 - Direct costs of four common administrative procedures impose total burden equal to 26.7% of profits for the average small and medium company Licensing

Permits

Inspections

Certification

Total

Individual entrepreneur

1.3%

0.8%

1.2%

0.8%

4.2%

Small and medium company

4.0%

6.2%

10.5%

6.1%

26.7%

Box 1 presents a high-level overview of the main findings of the survey. In many ways, the business environment for small and medium companies, who operate at the larger end of the SME spectrum, remains challenging. 1

Because 2007 is the reference period for the survey, all calculations of survey findings in dollar figures in this report are performed using the exchange rate as of January 1, 2008, which was 1 USD = 3.465 Tajik somoni.

2

The disproportionate impact of regulatory compliance costs on SMEs has been repeatedly documented. See for example, “Policy Framework Paper on Business Licensing Reform and Simplification.” The World Bank Group’s Investment Climate Advisory Service. 2009.

3

Analysis of survey data and official statistics of direct costs of inspections (official and unofficial payments), but also the indirect costs (labor costs and lost profits). See Chapter 6 for details.

4

In several cases, survey data on dehkan farms was too limited to allow for the analysis in tables 0.1 and 0.2, thus dehkan farms have been excluded in this discussion.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary

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Data from the State Statistics Committee indicates very limited growth in their numbers, compared to high growth in the rest of the SME sector (individual entrepreneurs and dehkan farms). The increase in numbers of businesses in the SME sector is driven by dehkan farms and individual entrepreneurs. From 2002 to 2007, the number of dehkan farms increased by about 16% a year, and the number of individual entrepreneurs increased by 10% a year. Small and medium companies, by contrast, grew at only 5% a year during this period, and in 2007 represented 5% of all businesses. According to the State Statistics Committee, there were just 334 more small and medium companies registered in Tajikistan at the start of 2008 than at the start of 2006.

Box 1 - The Big Picture: High-Level Findings from the IFC SME Survey -

Individual entrepreneurship is an increasingly popular form for SMEs, and relatively few of them transition to become legal entities (small and medium companies). Small and medium companies face a significantly more difficult regulatory environment.

-

Women run 36% of individual entrepreneurs and 16% of small and medium companies. Women are among the owners of just over half of these firms. Only 9% of dehkan farms are run by women, although half of dehkan farm employees are women.

-

Investment in fixed assets has fallen among all categories of SMEs since 2002.

-

SMEs spent more money on registration in 2007 than in 2005, even though no legal or regulatory changes explain the increase. Registration costs show wide variation among regions of Tajikistan, again with no legal basis.

-

Implementation of the 2004 Licensing Law has led to some improvements, most notably an increase in the average validity of an issued license. However, licensing is still a lengthy and expensive process for the small and medium companies who must obtain licenses.

-

Permits show many of the same trends as licenses since 2005 in terms of direct and indirect costs, perhaps due to spillover effects from the licensing reform.

- Relatively few Tajik SMEs have a bank account or loan. SMEs overwhelmingly cite unfavorable interest rates as the reason they don’t apply for financing. -

The 2006 Inspections Law and its implementation resulted in annual savings to the Tajik SME sector of $9.3 million, reflecting savings to individual entrepreneurs and dehkan farms offset by an increase in costs to small and medium companies.

-

The tax regime for SMEs is complicated, requiring businesses to make five to ten visits each year to the tax authorities. The average small and medium company spent more than three weeks on the process of filing and paying taxes in 2007.

-

Import and export procedures are too complicated for most SMEs. Only 24% of small and medium companies import goods, and fewer than 3% export. The figures for individual entrepreneurs and dehkan farms are much smaller.

-

More SMEs needed to obtain compulsory certificates in 2007 than in 2005, although the process was less timeconsuming.

-

For virtually all procedures, SMEs report making unofficial payments less often than in 2005 or 2002. However, Tajikistan still has the highest frequency of informal gifts requested from firms by government officials in the entire Eastern Europe and Central Asia region.

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary


Executive Summary

The dynamic growth in individual entrepreneurs, both in terms of number of entrepreneurs and their average revenue, coupled with the low growth of small and medium companies, indicate that the tax system and regulatory regime are not designed and implemented in a way that encourages “graduation” from individual entrepreneurship to legal entity status. It is vital that policymakers take steps to improve the business environment for small and medium companies, who should represent the backbone of the economy. Indeed, as the average small and medium company is more than twice as likely to invest in fixed assets than the average individual entrepreneur, hires seven times as many employees and contributes significantly more tax revenues, the business environment should encourage its development.

Many administrative procedures are less common in 2007 than in 2005 In a well-functioning regulatory system, regulators maximize state resources and increase effectiveness by focusing their efforts on “high-risk” businesses, rather than requiring all businesses to go through every procedure every year. For example, inspectors do not need to visit every business every year. They should focus on those most likely to violate health and safety regulations, and on those who are most likely to create serious harm to public health and welfare by non-compliant actions. Permits and licenses, two complementary forms of state control over economic activity, can often be issued for a several year period, rather than requiring businesses to renew their permits and licenses annually. IFC SME Survey results reveal significant improvement in the prevalence of some administrative procedures from 2005 to 2007 (see сhart 1). Far fewer SMEs were inspected in 2007 than in 2005, reflecting intense implementation efforts related to the 2006 Inspections Law. The percentage of SMEs who report obtaining a permit also dropped significantly, particularly for dehkan farms. The government of Tajikistan undertook comprehensive reform of the licensing regime with the 2004 Licensing Law, and fewer small and medium companies and dehkan farms report obtaining a license in 2007 than in 2005. However, progress is mixed, as individual entrepreneurs are now almost twice as likely to need a license. Unfortunately, across the SME sector, businesses are much more likely to have obtained a compulsory certificate in 2007 than in 2005. Compulsory certificates vary by sector of economic activity, such as veterinary or quarantine certificates from the Sanitary and Epidemiological Service for livestock owners, certificates of origin from the Chamber of Commerce and Industry for exporters, or cotton certificates from TajikStandart for cotton exporters. The certification process often imposes a significant burden on SMEs without producing commensurate benefits.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary

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Chart 1 – Fewer firms were affected by inspections and permits in 2007 than in 2005, but compulsory certification became more common Percentage of firms who underwent selected procedures in 2007 vs. 2005 100 2007 data

90

Inspections

80

Permits

70

Certificate Licensing

60 50

2005 data Fewer SMEs affected

40

than in 2005

30

More SMEs affected

20

than in 2005

10 0 Small and medium companies

Individual entrepreneurs

Dehkan farms

SMEs identify their biggest challenges in running their businesses To put the different aspects of the business environment in context, the IFC SME Survey asked respondents to identify the single biggest obstacle faced by their business. As the chart below shows, access to finance, tax rates, and access to electricity are the leading obstacles cited by SMEs. Chart 2 - SMEs identify access to electricity, tax rates, and access to finance as the major obstacles in Tajikistan’s business environment % of survey respondents identifying each of the following as the single biggest obstacle they face 51

Individual entrepreneurs Small and medium companies

3 2

9 1 1 0

3 1 2

1 0 2

0 0 0 Courts

3 4

Labor regulations

13

Political instability

3 3

1

Transport

0

4

8

Tax administration

0

10

Customs & trade

0

8 5

Access to land

1

4 5

Licensing & permits

1

5

Corruption

Access to finance

Tax rates

Access to electricity

1

6

Uneducated labor

8

Informal competition

16

22 19 1717 12

Crime & theft

Dehkan farms

25

The different members of the SME sector choose different challenges as their most pressing issue. Access to finance is clearly the most important obstacle for dehkan farms. Access to electricity is the major constraint for 1 in 4 small and medium companies. High tax rates are the number one challenge cited by individual entrepreneurs.

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary


Executive Summary

Key Recommendations One purpose of the IFC SME Survey is to identify exactly which areas to reform to lower the regulatory burden, helping Tajik policymakers to establish priorities to encourage entrepreneurs to start new legal entities or grow existing businesses. Development of new legal entities and expansion of existing businesses promotes job creation and poverty reduction. The Survey data provides the foundation for identification of reforms that can most impact the costs of administrative procedures for business. This report puts such reforms in the context of the Tajikistan country situation, including reform efforts already underway or recommended. The government is building on earlier comprehensive reforms of licensing and inspections by expanding its reform program in 2009 to address business registration, customs reform, tax administration, and permits reform. Other substantial reforms, not within the scope of this survey report, have taken place or are underway in areas as diverse as agricultural policy, land reform, and corporate governance. The table below summarizes the key recommendations on the topics covered in the IFC SME Survey. Recommendations are covered in detail in each chapter. Table 2 - IFC key recommendations highlight further transparency in processes, simplification of steps, and full implementation of relevant laws Registration 1.

Implement the one-stop shop with a vision for additional reform beyond initial simplification.

2.

Extend the deadline for re-registration of existing businesses, or better, remove this requirement entirely.

3.

Eliminate unnecessary steps in the registration process, which create additional burdens on entrepreneurs without leading to economic benefits. Licensing

1.

Look for opportunities to further reduce the number of activities subject to licensing by excluding activities that present limited risk to public safety and health, such as tourism, real estate valuation, cargo transportation, and patent attorneys’ activities.

2.

Increase transparency in and simplify the licensing issuance procedure, by: publishing licensing requirements and calculation of licensing fees; introducing, where appropriate, the “silence is consent” and “self-certification” principles via legal amendments; and amending the 2004 Law on Licensing to list the specific reasons for which license applications may be rejected or license revoked.

3.

Extend license validity to an unlimited period, unless periodic review of the license holder’s qualifications is necessary. Permits

1.

Develop a comprehensive inventory of all permits currently being issued, to guide reform efforts. Work with the private sector to identify which specific permits are the most troublesome.

2.

Eliminate duplicative and unnecessary permits through a “guillotine” process.

3.

Adopt a Law on Permits to clarify and streamline the application and issuance processes of new permits. Access to Finance

1.

Implement the recommendations of the Financial Sector Assessment Program.

2.

Encourage private investors to develop a private credit bureau.

3.

Train lawyers and judges on collateral requirements and on their role in the enforcement of loan and lease agreements. It is essential that lenders have confidence in the legal system’s ability to enforce loan and lease agreements, otherwise improvements in collateral registries may not translate into increased lending.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary

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4.

Improve the legal framework governing the pledge of land use certificates to enable better their use as collateral. Publicize the property registry at the Ministry of Justice among lenders and potential borrowers. Inspections

1.

Inspectorates should come into full compliance with the 2006 Inspections Law requirements by using checklists; sending advance notice to businesses; developing risk categories and risk based inspections procedures; and establishing a suitable record-keeping function to keep track of inspections which have been carried out and their results.

2.

The government of Tajikistan should: assist entrepreneurs in the fulfillment of their responsibilities under the Inspections Law; assist inspectorates in the fulfillment of their responsibilities under the Inspections Law; and enforce compliance with the Inspections Law. Taxation

1.

Consider elimination of the road user’s tax, which is inherently regressive and disproportionately burdens businesses with a low profit margin.

2.

Elaborate and publicize clear rules about the personal income tax for dehkan farmers.

3.

Consider whether decreasing the rate of the social tax may be possible without jeopardizing government revenues. The fairly high rate of the social tax encourages tax evasion and may inhibit job creation in the formal sector.

4.

Undertake a legal review of the Tax Code in order to reduce ambiguous sections and to limit scope for interpretation. Limit the frequency of amendments to tax legislation to an annual basis, in order to provide a longer-term time horizon for business planning purposes.

5.

Provide compliance relief to taxpayers by reducing the number of filings per year per tax, and by simplifying the forms used to file. Filings should ideally only be required annually or, in the instance of VAT, quarterly. Payments ought to be allowed more frequently, to allow businesses to manage their expenses.

6.

Review the various simplified regimes with a view to further simplifying the current structure and better aligning the simplified regimes with the general tax regime. The goal should be to facilitate “graduation” of businesses from individual entrepreneurship to legal entity status. Foreign Trade and Technical Regulation

1.

Simplify export and import procedures in keeping with the Single Administrative Document and Single Window for customs procedures.

2.

Create a “single window” for customs procedures, based on the concept paper developed by government.

3.

Implement customs-bonded warehousing. Customs bonded warehouses can be used effectively to allow traders to defer payment of duty/tax on specified goods while they are in storage.

4.

Employ consistent valuation methods and other procedures at different border points in Tajikistan. Create a Valuation Dispute Resolution Administrative Tribunal to handle disputes on valuation methods during import.

5.

Improve transparency and data exchange by moving to an electronic trade declaration system, using ASYCUDA or another system. Host all data and processing at the Customs Service headquarters, rather than regional offices, to reduce costs and prevent duplication of technical infrastructure.

6.

Make certification optional for low risk categories of goods and all services.

7.

Develop a roadmap for comprehensive reform of Tajikistan’s technical regulation system and TajikStandart. Reform should bring Tajikistan into compliance with WTO requirements. It should also pave the way for other conformity assessment bodies to enter the market.

8.

Ensure that mandatory technical regulations, as well as voluntary standards, are in conformity with international standards usually issued by multilateral technical organizations whenever possible.

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary


Executive Summary

Unofficial payments, despite improvement, remain high by regional standards Chapters 2 through 8 will show improvement on many survey questions related to informal payments from 2002 to 2005 to 2007. In other words, Tajik SMEs report being asked for or expected to pay bribes or give gifts in 2007 less often than before. While this is a welcome development, it is too early to conclude that unofficial payments are no longer a problem. Survey data show that 21% of small and medium companies identify corruption as a major obstacle to the operation of their business (only tax rates are identified as a major obstacle more often). Data from the World Bank’s Enterprise Surveys confirm that corruption is still a major constraint for private businesses in Tajikistan, as demonstrated by the highest frequency of informal gifts requested from firms by government officials (graft index) in the entire Eastern Europe and Central Asia (ECA) region. The Graft Index is the proportion of instances in which firms were either expected or requested to pay a gift or informal payment over the number of total solicitations for public services, licenses or permits for that country.5 Chart 3 - Tajikistan has the highest graft index in Europe and Central Asia (ECA) 35 30 25 20

ECA Regional Average

15 10

Tajikistan

Azerbaijan

Uzbekistan

Kyrgyz Republic

Russia

Ukraine

Kazakhstan

Albania

Moldova

Armenia

Serbia

Lithuania

Romania

Macedonia FYR

Poland

Bosnia and Herzegovina

Belarus

Turkey

Bulgaria

Estonia

Georgia

Croatia

Czech Republic

Latvia

Slovakia

Kosovo

Hungary

Montenegro

Slovenia

0

Data from Enterprise Surveys, here and throughout the report, are presented to allow readers to put the IFC SME Survey data into a regional context.

Likely effects of the global economic crisis The IFC SME Survey was conducted in July – October 2008, and it asked respondents about the calendar year 2007. The global economic crisis arrived in Tajikistan in late 2008, and thus its effects are not recorded in this survey report. The crisis is likely to produce diverse and generally negative effects on the business environment for SMEs. It is already clear that remittances for the year 2009 will be substantially lower than in prior years, affecting an important source of funding for both consumer spending and small business investment. Access to finance is likely to become an even higher priority for SMEs, just as domestic banks find it yet more difficult to expand their own sources of financing. The tax authorities are under increasing pressure to deliver revenues into the state budget, even as businesses are themselves finding it hard to stay afloat in the wake of falling demand.

5

The Graft Index is defined in Gonzalez, Alvaro S., Ernesto Lopez-Cordova, J. and E. Valladares, Elio, The Incidence of Graft on DevelopingCountry Firms. World Bank Policy Research Working Paper Series, 2007. The ECA countries were all surveyed in either 2008 or 2009.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary

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If there is a silver lining, it is that tough economic times often generate a tremendous amount of entrepreneurial innovation. Crises also present governments with a window for reform, as constituents look to their leaders to respond decisively to the challenging external environment. The 200 Days of Reform program, launched by the government of Tajikistan in July 2009, is an attempt to sustain and even increase the momentum of reforms that will benefit Tajikistan’s private sector. Full implementation of investment climate reforms is one way to help the Tajik economy grow its way out of the global crisis.

Organization of the rest of the report The SME Overview chapter paints a general picture of Tajikistan’s macroeconomic situation, as well as providing a data-driven description of each of the three categories of SMEs in the survey: individual entrepreneurs, small and medium companies, and dehkan farms. Chapters 2 through 8 provide an in-depth look at survey findings on a variety of key topics, and each chapter begins with an explanation of the legal and regulatory framework of the topic. Chapter 9 provides an overview of the survey methodology, and the Methodology Annex that follows presents more detailed information. Finally, the report also has a Survey Data Annex which presents additional findings graphically.

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Executive Summary


Chapter 1 - SMEs in Tajikistan –

Overview of the Sector, Main Trends and Business Expectations


1

Chapter 1 – SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations While the economy of Tajikistan has seen stable growth in the last three years, the small and medium enterprise (SME) sector is developing unevenly.1 Thanks to easier administrative procedures, the number of individual entrepreneurs and dekhan farms are growing rapidly, while small and medium companies are very few and expanding at a slower pace. The global economic crisis arrived in Tajikistan in late 2008, manifesting itself in rapid currency depreciation and falling worker remittances from Russia. Remittances make up about half of Tajikistan’s GDP, and they provide a financial lifeline to hundreds of thousands of Tajik families. Remittances in 2009 are expected to be less than 50% of the 2008 level, and this decline will surely push many Tajiks below the poverty line. Decreased consumer spending will lead to job losses within Tajikistan. While the crisis presents several challenges to Tajik policymakers, it also provides an opportunity for reform. Improvement of the investment climate is one way for Tajikistan to support short-term relief for Tajik businesses, while also supporting long-term development.

1.1 – Tajikistan’s macroeconomic environment remains challenging The Tajik economy has continued its strong growth since 2000, with real economic growth rates at an average of 7.2 percent per year throughout 2006-2008. Economic growth has also contributed to poverty reduction in the country. The poverty level2 decreased to 53 percent of the population in 2007, while extreme poverty in the same year decreased to 17 percent of the population. Growth in Tajikistan has been driven largely by a favorable external environment, including rising world prices of cotton and aluminum, and strong growth in Russia and other trading partners, leading to rising demand for Tajik labor, which in turn has resulted in strong growth in remittances. Tajikistan is now one of the most remittancedependent countries in the world. Remittances in 2008 totaled US$2.3 billion, about 50 percent of GDP.3 Low inflation of 7% in 2004-2005 jumped to 20% in 2007, before receding in 2008 to 12% year-on-year, helped by the decline in inter1 Throughout this report, the “SME sector” refers to individual entrepreneurs, dehkan farms, and legal entities with fewer than 200 employees.

20

2

Purchasing power parity at US$2.15 per capita per day

3

World Bank

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

national food and fuel prices. The trade deficit widened from 34 percent of GDP in 2006 and to about 45 percent of GDP in 2007, and then stabilized in 2008 at 40 percent of GDP. The balance of payments registered a surplus in 2008, owing to a surge in remittances by 50 percent over 2007. With population growth (2.1% a year on average) lagging behind the real GDP growth, GDP per capita enjoyed a substantial increase as well over the period. Despite its growth, Tajikistan’s economy has still not fully recovered from the effects of the collapse of the Soviet Union and the civil war. GDP in 2007 was still only 72% of the 1991 level in real terms (see chart 1.1). Chart 1.1 – Real GDP continues to recover but has not reached the level of 19914 4

100 80 60 40 20 0 1991

1993

1995

1997

1999

2001

2003

2005

2007

The rate of economic growth will decline in 2009, as the global economic crisis affects all key drivers of the Tajik economy with falling commodity prices (cotton, aluminum) and weakening demand for unskilled labor in Russia (hurting remittances). Remittances account for about 50% of GDP, yet in 2009 they are expected to be at least 30% less than in 2008. Table 1.1 - Macroeconomic indicators5 Indicator

Unit

2005

2006

2007

2008

GDP (nominal)

million TJS

7,201

9,272

12,780

17,609

GDP (nominal)

million USD

2,310

2,811

3,712

5,101

GDP per capita

TJS

1,041

1,319

1,780

2,397

GDP per capita

USD

334

398

514

710

CPI inflation

%

7.1

12.5

19.7

11.8

Real GDP growth

%

6.7

7.0

7.8

7.9

Population

million

6.9

7.1

7.2

7.3

Trade balance

million USD

-323

-675

-1558

-1863

Export (FOB)

million USD

1,108

1,455

1,557

1,406

Import (FOB)

million USD

1,431

2,130

3,115

3,270

Exchange rate

USD to 1 TJS, end of period

3.20

3.43

3.46

3.50

4

Source: State Statistics Committee. Data not available for 2008.

5

Source: National Bank of Tajikistan, Banking statistics bulletin / 10 (159), Dushanbe 2008. Figures for 2008 are preliminary and subject to change. http://nbt.tj en/?c=4&id=105

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

21


1

BOX 1.1 - Regional overview of the Tajik economy The IFC survey makes use of the following regional division: -- Dushanbe city (the capital). -- Districts of the Republican Subordination (DRS) in the central part of the country; -- Gorno-Badakhshan Autonomous Province (GBAO) in the East of the country; -- Khatlon province in the South with two districts - Kurgan-tube and Kulyab; -- Sughd province in the North of the country. Dushanbe - the capital of the country - is the most dynamically developing region in terms of business activities and entrepreneurship, accounting for more than 39% of the total number of SMEs active in Tajikistan. The Districts of Republican Subordination host 22% of the population and boast a diverse economy. DRS is home to about 21% of the country’s agricultural production, but also some large industries like the Talco Aluminum Plant and porcelain ceramic factory that make up more than 40% of Tajikistan’s industrial output. Small and medium businesses are mostly concentrated in larger cities and districts, such as Tursunzade and the Hissar valley. Due to its very mountainous terrain (highest altitude is 7,495m at Ismoil Somoni Peak), GBAO is difficult to access and has a very low population density (3% of the total Tajik population). It is, therefore, the least developed region of the country with a small SME sector. Khatlon province accounts for about 36% of the country’s population. About 324 industrial firms are situated in this province, including textile factories, meat-packing plants and 11 industry giants like Joint Venture “Tajikazot” (plant for nitrogenous fertilizer), and Open Joint Stock Company ”Transformator“ (production of transformers). The majority of the country’s cotton is produced in Khatlon, as well as most of its non-cotton agricultural production like vegetable-growing, livestock-breeding, and poultry farming (the province contributes 43% of Tajikistan’s agricultural product). Sughd province is one of the most developed and industrialized regions of the country contributing 17% of industrial output of the economy. Tajikistan’s second most populous city, Khujand, is located here. Twelve percent1 of all companies with foreign investments are situated in Sughd. Sughd hosts 30% of the population and has the highest population density. Number of citizens, in thousands

Number registered SMEs, in thousands

DRS A

DRS B

• Khujand

GBAO

Sughd

2,132

Sughd

2,279 DRS

1,607

1,396 Khatlon

679

3,140

* Dushanbe GBAO

218

125

• Kurgan-Tube • Kuljab Khatlon

2,579

1,044

• Khorog

Source: State Statistical Committee (2008)

22

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

1.2 - The SME sector is the major employer in Tajikistan For the purposes of this survey, the SME sector of Tajikistan is broken into three types of businesses. These are individual entrepreneurs (i.e., sole proprietors of an enterprise without any juridical status), dehkan farmers (i.e., owners of private agricultural farms), and small and medium companies (i.e., legal entities) which tend to be of a larger scale. According to the State Statistics Committee, there are fewer than 200 businesses in Tajikistan which employ more than 200 workers. Thus, small and medium enterprises are the vast majority of the approximately 155,000 businesses in Tajikistan (see chart 1.2) and their importance to the economy grows every year. The private sector as a whole accounted for 43% of GDP in 2007, with an average growth of 5.3% since 2001. Chart 1.2 - Composition of Tajikistan’s private sector in 2007 Number of businesses 32,631

7,374 Individual entrepreneurs

610 8,161

114,676

177

Dehkan farms Small companies (less than 30 workers) Medium companies (31 to 200 workers) Large companies (200 or more workers)

Source: State Statistics Committee

The SME sector employed about 1,076,000 people in 20076, or about 50% of total employment in Tajikistan (see chart 1.3). Another two percent of the labor force is engaged in larger firms in the private sector, and the remaining 48% do not work in the private sector. While the share of each type of business in the overall SME sector has remained largely consistent from 2005 to 2007, their contributions to revenue and employment have changed during this time (see chart 1.4).

6

Source: State Statistics Committee. There are two off-setting caveats to this figure. Since the data include only the self-employment figures of individual entrepreneurs and do not take into account possible hired employees, the number may be too low. Since the data on number of individual entrepreneurs is based on the number of patents and certificates issued, and some individuals may hold multiple patents or certificates, the number may be too high.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

23


1

Chart 1.3 - SMEs provide an ever-growing share of jobs in Tajikistan7 Contribution of SME employment to total employment 50 33

28

2002

2005

2007

Chart 1.4 - Small and medium companies have dramatically reduced their contribution to total SME sector revenues8

21

21

6

5

21

9 23

49

66

39 73

15

74 40

2005

2007

Contribution to total number of SME businesses, %

Individual entrepreneurs

12

69

2005

36

2007

Contribution to total SME sector revenues, %

Small and medium companies

2005

21 2007

Contribution to total SME sector employment, %

Dehkan farms

In 2007, fully two out of three SME workers were employed in the agricultural sector (in 2005 this figure was one out of two), yet the farm share of revenues has fallen to just 9%. As section 1.5 will show, dehkan farmer average turnover fell almost 30% from 2005. Small and medium companies decreased their share in total number of SME businesses by only one percentage point from 2005 to 2007, but small and medium company contribution to SME revenues fell disproportionately (by 16 percentage points). Individual entrepreneurs became the dominant producers of revenue in the SME sector, even as their share in employment fell. Two factors drive the turnaround in SME revenue from 2005 to 2007:

24

7

Share in total employment calculated by IFC using number of registered individual entrepreneurs, small and medium companies and dehkan farmers (according to the State Statistics Committee) and the number of employees hired per firm (from the IFC survey) and comparing to total labor force (the actually occupied economically active population) per the State Statistics Committee.

8

The 2006 IFC SME Survey report contained incorrect figures in Chart 1.5. The present chart contains corrected figures. Employment figures calculated by IFC using number of registered individual entrepreneurs, small and medium companies and DFs (according to the State Statistics Committee) and the number of employees hired per firm (from the IFC survey).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

--

T he modest growth of small and medium companies (11% increase in average turnover) lagged behind the remarkable growth of individual entrepreneurs (189% increase in average turnover).

--

T he State Statistics Committee reports that only 334 small and medium companies registered in 2006 or 2007, compared to the 28,000 new individual entrepreneurs during these two years.

Small and medium companies were also less productive than either individual entrepreneurs or dehkan farmers in 2007 (chart 1.5). One would expect the larger turnover of small and medium companies to allow them to capture economies of scale in the production process. Chart 1.5 - Productivity across the SME sector9 1.6

1.6

1.3

Individual entrepreneurs

Small and medium companies

Dehkan farms

Tajikistan’s capital city, Dushanbe, is also the center of entrepreneurship (chart 1.6). There are 51 SMEs per every 1,000 residents in Dushanbe, compared to a rate of just 14 in southern Tajikistan (Khatlon). This high figure is partly explained by Dushanbe’s very urban nature. The other economic powerhouse in Tajikistan, Sughd oblast, contains not just the country’s second city but also a large rural land area; this may artificially lower the SME density as compared to Dushanbe. Chart 1.6 - Comparison of population distribution of Tajikistan to the business density 51 32 22

29

24

20 4

Dushanbe

Regional population distribution in %

Sughd

GBAO

19

DRS

22 Number of SMEs per 1,000 inhabitants

14

Khatlon

Source: State Statistics Committee

9

Productivity is calculated by IFC as a ratio of Total Annual Turnover to [Total Annual Turnover less Total Annual Profit].

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

25


1

1.3 – Individual Entrepreneur revenues are increasing An individual entrepreneur is an individual (sole proprietor) who is involved in a business activity without forming a legal entity and operates it at his/her own risk. Individual entrepreneurs can register and run their business on two different legal bases:10 --

T wo out of three individual entrepreneurs work under patent, which provides for simplified taxation. To be eligible for the patent, individual entrepreneurs must have turnover of less than 200,000 somoni annually (about $63,000), may not import or export goods, and may not hire employees. The cost of a patent is fixed, according to the type of activity engaged in by the entrepreneur. The patent must be renewed annually;

--

T he certificate is a more structured legal form, providing additional flexibility at the expense of stricter fiscal and accounting requirements. There are 2 types of certificate holders, those whose tax obligations are calculated based on profits (standard regime) and those whose tax obligations are calculated on a turnover basis (simplified regime). There is no ceiling on turnover for certificate holders in the standard regime; they are able to engage in international trade; and they may hire staff.

Individual entrepreneurs are the largest category of SMEs in Tajikistan, both in terms of numbers as well as share of revenues. The number of individual entrepreneurs increased impressively from 2002 to 2007, with average annual growth of 10%.11 At the beginning of 2008 there were 117,000 entities (see chart 1.7). Table 1.2 describes the average Tajik individual entrepreneur. Chart 1.7 - The number of businesses run by individual entrepreneurs continues to rise (`000s) CAGR=10% from 2002 to 2007 71

2002

117 89

2005

2007

Source: Tax Committee

10

11

26

See Chapter 2 on Registration and Chapter 7 on Taxation for more detailed explanations of the differences between patent-holders and certificate-holders. Compound annual growth rate

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

Not only has the individual entrepreneur segment grown in terms of total population, but the average individual entrepreneur is now much larger than just two years prior. Table 1.2 - The “typical” Tajik individual entrepreneur in Tajikistan 2005

2007 Average annual turnover

49,164 TJS

14,460 USD

17,000 TJS

Average annual profit

6,492 TJS

1,874 USD

4,000 TJS

Number of employees

2

2

According to the survey, the average turnover of individual entrepreneurs in 2007 is almost triple that in 2005. Average annual profit increased 62% over this period. The profitability of individual entrepreneurs in Dushanbe is 22% in 2007, nearly identical to the 23% profitability in 2005. This stability is despite the growth in the value of total annual sales of Dushanbe individual entrepreneurs, from 34,500 somoni in 2005 to 58,000 in 2007, in addition to the growth in total number of firms. Dushanbe individual entrepreneurs have twice the annual sales value of their Sughd counterparts, although firms in Sughd are more profitable. The largest individual entrepreneurs are in Kulyab and DRS A (see chart 1.8). 12

Chart 1.8 – Dushanbe entrepreneurs report lower profitability than those in other regions12 88,449

37

69,412

34 30

31,958

24

57,918

22

31,549

22

25,344 15,000

KurganTube

GBAO

Kulyab

Sughd

Dushanbe

Value of establishment’s total annual sales, TJS

12

DRS A

DRS B

Profitability, %

Profitability for DRS B is not shown, as none of the firms in this region replied to the question on profits. Profitability calculated by IFC as Net Profit divided by Total Annual Sales.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

27


1

Women play an important role in the individual entrepreneur segment of the SME sector (see chart 1.9). Survey results indicate that 42% of the people working as individual entrepreneurs are women. Of the average of two employees per individual entrepreneur, the top manager is a woman in more than 1 in 3 individual entrepreneurs. Chart 1.9 - Women are well-represented in the individual entrepreneur segment Individual entrepreneur respondents, by gender of top manager

36%

Workers (managers and employees) in individual entrepreneur respondents, by gender

42% Male Female

58%

64%

Retail traders form the majority of individual entrepreneurs (see chart 1.10). The breakdown of individual entrepreneurs by economic activity is largely consistent with 2005, in which 73% were retail traders. Consumer services now attracts more individual entrepreneurs than in 2005 (6%), and relatively fewer are engaged in catering than in 2005 (11%). Chart 1.10 - 3 out of 4 individual entrepreneurs are traders Percentage of individual entrepreneur respondents working in the given sector 4% 6% 9%

4% 2%1%

74% Retail trade Consumer services Transport Wholesale trade Catering Communication Other

28

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

1.4 - Small and medium companies are not growing For the purposes of this survey, a small and medium company is a privately owned legal entity which employs between 1 and 200 employees.13 At the beginning of 2008, there were just 334 more small and medium companies registered in Tajikistan than at the start of 2006 (chart 1.11). Given the growth in the number of dehkan farmers and individual entrepreneurs, small and medium companies now form just 5% of the entire SME sector by population. Chart 1.11 - Little net growth in small and medium companies CAGR=5% from 2002 to 2007 7,650

7,984

2005

2007

6,192

2002 Source: State Statistics Committee

Table 1.3 illustrates a “typical” small and medium company. On average, small and medium companies employed 15 employees on a permanent basis and 13 on contracts. Average annual turnover rose 11% from 2005’s average, not enough to keep pace with inflation. Further, the profit margin shrank, as the average firm fell short of 2005’s average profit. Table 1.3 – The “typical” small and medium company 2007

13

2005

Average annual turnover

239,156 TJS

69,020 USD

216,000 TJS

Average annual profit

14,707 TJS

4,244 USD

16,700 TJS

Number of employees (permanent)

15

15

Number of employees (contract)

13

6

This definition is provided by the State Statistics Committee, which does not consider any limit in terms of annual turnover.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

29


1

Chart 1.12 – Women manage 16% of small and medium companies Small and medium company respondents, by gender of top manager

16%

Workers (managers and employees) in small and medium company respondents, by gender

29% Male Female

73% 84%

Women are the top manager in 16% of small and medium companies, and 29% of a small and medium company’s employees are female (chart 1.12). Except for a few outliers in DRS B, the average small and medium company’s rate of profitability was in the single digits (chart 1.13). In 2005, the average Dushanbe small and medium company reported 16% profitability, and in Sughd 13%. 14

Chart 1.13 - Profitability of small and medium companies is low compared to the rest of the SME sector14 326,453 45

264,853 199,006 24

19

33,684

DRS B

GBAO

Sughd

171,564

166,457

178,186

13

13

DRS A

KurganTube

17

Kulyab

Value of establishment’s total annual sales, TJS

10

Dushanbe

Profitability, %

Lack of growth in the small and medium company population is explained partly by their difficult business environment. As the following chapters show, small and medium companies face significantly greater obstacles than do individual entrepreneurs, on virtually every aspect of the IFC SME Survey. Small and medium companies report paying 12% of sales as informal payments or gifts to public officials to “get things done” in 14

30

Profitability calculated by IFC as Net Profit divided by Total Annual Sales.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

areas such as customs, tax, licenses, and other interactions with government. This “corruption tax” is substantially more than the reported informal payments for individual entrepreneurs or dehkan farmers (see chart 1.14), and it may be one reason why the average small and medium company’s profits fell 12% from 2005 to 2007 (see table 1.3). Chart 1.14 - Informal payments cut into sales for small and medium companies % of total sales paid to public officials as gifts or unofficial payments to “get things done” 12% 5%

Individual entrepreneurs

3%

Small and medium companies

Dehkan farms

Small and medium companies produce a wide array of goods and services (chart 1.15), and their size and diversity makes them a good barometer for the Tajik economy as a whole. This makes the difficulties faced by small and medium companies all the more troubling, and it should provide impetus to policymakers to continue with the development and implementation of reforms targeting small business. Chart 1.15 – Small and medium companies provide a variety of goods and services Percentage of individual entrepreneur respondents working in the given sector 6%

4% 3%

22%

7% 9% 13% 11% 12%

Consumer services

Wholesale trade

Construction

Consulting services

Retail trade

Tourism

Consumer good

Medical services

production

Other

Transport

13%

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

31


1

BOX 1.2 - About the World Bank’s Enterprise Surveys Enterprise Surveys are conducted by the World Bank and its partners across all geographic regions and cover small, medium, and large companies. The surveys are applied to a representative sample of firms in the non-agricultural economy. The sample is consistently defined in all countries and includes the entire manufacturing sector, the services sector, and the transportation and construction sectors. Public utilities, government services, health care, and financial services sectors are not included in the sample. Enterprise Surveys collect a wide array of qualitative and quantitative information through face-to-face interviews with firm managers and owners regarding the business environment in their countries and the productivity of their firms. The topics covered in Enterprise Surveys include the obstacles to doing business, infrastructure, finance, labor, corruption and regulation, law and order, innovation and technology, trade, and firm productivity. For the first time, in 2008 the IFC SME Survey and the Enterprise Survey for Tajikistan and other regional countries were harmonized. Some of the same questions were asked in each survey, although they were asked of different firms. This harmonization allows for comparison across countries of exactly the same questions, asked of firms with the same characteristics. All data in the present report is from the IFC SME Survey, except when noted otherwise. When reviewing data results from Enterprise Surveys, consider the following differences in surveyed firms: Small And Medium Companies In The IFC SME Survey

Small And Medium Companies In The World Bank Enterprise Survey

Firm size

1 To 200 Employees

5 or more employees

Sector

All sectors

All non-agricultural sectors

Region

44 rayons in all parts of Tajikistan

4 cities (Dushanbe, Khujand, Kurgan-Tube, Tursonzade) and 2 DRS rayons (Rudaki and Hissar)

Topics

Business environment, finance, licensing, permits, inspections, and taxation

Business environment, finance, infrastructure, labor, corruption and regulations, innovations and technology, productivity

Reference period

All questions asked firms about their experience in 2007

Some questions asked firms about 2007, others about 2005-2007

Number of respondents

559 legal entities (not counting the individual entrepreneurs or dehkan farms)

360 legal entities

To enable better comparison of Enterprise Surveys data with IFC SME Survey data, in many charts throughout this report a subset of the Enterprise Surveys respondents is presented. Data are shown for firms with 5 to 200 respondents, whose sectoral breakdown is shown below. Attachment 1.1 presents this information by region. See Chapter 9 on Methodology or www.enterprisesurveys.org for a more information.

Production of consumer goods, construction, and trade are most common among Enterprise Surveys respondents Percentage of Enterprise Surveys respondents with between 5 and 200 employees working in the given sector

7% 9%

4% Transport

31%

Tourism Consumer good production Construction Wholesale trade

16%

Retail trade Other

16%

32

17%

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

1.5 – Dehkan farm revenues are falling A dehkan farm is an enterprise involved in the production and sale of agricultural products. The overwhelming majority of dehkan farms operate as individual entrepreneurs working on a certificate basis. A farm can also be organized as a legal entity, in the form of a business partnership or a production co-operative.15 From 2002 to 2007, the number of dehkan farm increased at a compound annual growth rate of about 16% (chart 1.16). This growth is, to a great extent, due to government reforms in the agricultural sector aimed at transforming former large-scale, state-owned farms into smaller, privately owned enterprises. Dehkan farms employ well over half the workers in the SME sector, and the absolute number of farm employees continues to grow (see chart 1.17). Chart 1.16 - The number of dehkan farms has more than doubled in 5 years # of dehkan farms working on certificate basis, `000s CAGR=16% from 2002 to 2007 26

33

15

2002

2005

2007

Source: Land Committee

Chart 1.17 – Farm-based employment continues to grow16 # of employees, `000s 869

545 325

2002

2005

2007

Dehkan farms represent 21% of total SME sector businesses. Table 1.4 draws a picture of the typical dehkan farmer operating in Tajikistan.

15

See Chapter 2 on Business Registration for more information about the legal framework for dehkan farmers.

16

IFC calculation based on number of dehkan farms (from Land Committee) and number of employees per farm (from IFC Survey).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

33


1

Table 1.4 – The “typical” dehkan farm 2005

2007 Average annual turnover

21,880 TJS

6,315 USD

30,900 TJS

Average annual profit

4,830 TJS

1,394 USD

5,790 TJS

Number of employees (permanent)

13

20

In 2007, Dehkan farmers achieved only 71% of reported annual turnover in 2005, and they made only 83% of the reported profits in 2005.17 Most Tajik farmers plant cotton, and these cotton farmers suffer from massive debts and diminishing crop yields. Another reason for the reduced revenues at the average dehkan farm could be that dehkan farms are becoming smaller. While the survey doesn’t ask about the size of land plots, the increase in overall number of dehkan farms indicates that the average farm may be geographically smaller. Due to limited usage of tractors and other farm equipment, the agricultural sector remains labor intensive. Survey results indicate that the average dehkan farm employs 20 employees on a permanent basis, 50% of whom are women. The top manager is a woman at just 9% of dehkan farms (see chart 1.18). Chart 1.18 - Women comprise 50% of the workforce of dehkan farms Workers (managers and employees) in dehkan farm respondents, by gender

Dehkan farm respondents, by gender of top manager

9% Male Female

50%

50%

91%

Most dehkan farmers are in DRS A, Sughd province or Khatlon province (Kulyab and Kurgan-Tube), as shown in chart 1.19. The largest dehkan farmers by turnover are in Sughd, which is home to most of Tajikistan’s developing industry in fruit and vegetable agri-processing. While the ones in the DRS region see the highest profitability ratio in monetary terms, their revenues lag behind more agriculturally developed regions like Khatlon and Sughd provinces (see chart 1.19).

17

34

Data compares dehkan farmer responses to IFC SME Surveys covering 2005 and 2007.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

Chart 1.19 - Kulyab farms are the least profitable18 32,054

52

27,741

26,676

32 17,502

14,597 10,880

26

23

23

17

DRS B

DRS A

Sughd

GBAO

Kurgan-Tube

Kulyab

Profitability, %

Value of establishment’s total annual sales, TJS

1.6 - Despite some signs of optimism, investments across SME sector continue to fall Business satisfaction is almost returning to 2002 levels after a drop in 2005, based on the share of businesses who would start their business again. Now 70-80% of SMEs would start their business again, compared to just about 65% in 2005 (see chart 1.20). However, about 1 in 5 would not choose to do it all over again. Chart 1.20 - Share of entrepreneurs who would start their business again 4 23

73

2002

10

4

25

24

65

71

2005

2007

Individual entrepreneurs, %

2 10

13 24

88

2002

63

2005

2 18

4 10

80

86

2007

2002

20

26

Small and medium companies, % Don’t know

2

10

78

66

2005

2007

Dehkan farms, % No

Yes

A new survey question confirms this sense of optimism about the business environment. When asked to compare the business environment in 2007 to that in 2006, SMEs were more likely to say it had improved than worsened (see chart 1.21). Dehkan farmers were most positive about the improvement. Individual entrepreneurs were roughly split among those who thought it got better, worsened, or stayed the same.

18

Profitability calculated by IFC as Net Profit divided by Total Annual Sales.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations

35


1

Chart 1.21 - Assessment of business environment in 2007 compared to 2006 34 31

23

23

28

22

55

49

35

Individual entrepreneurs, %

Small and medium companies, %

Worsened

Dehkan farms, %

Unchanged

Improved

Despite the upward turn in business satisfaction, investment continues to fall across the SME sector (chart 1.22). The survey data shows a continuation of the drop in investments by SMEs into their businesses. The global financial crisis will only exacerbate this underinvestment, limiting the ability of SMEs to contribute to the ongoing economic development of Tajikistan. Access to external finance has improved for individual entrepreneurs and dehkan farmers, thus it appears likely that these businesses are using loan funding for purchases other than fixed assets.19 Chart 1.22 Percentage of SMEs who purchased fixed assets during year

55

45

2002

52 72

28 2005

53

60

85 48

47

15 2007

Individual entrepreneurs, %

2002

2005

40

2007

83

90

21

17

10

2002

2005

2007

Small and medium companies, % Invested

19

36

79

Dehkan farms, % Not invested

See Chapter 5 for access to finance information.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: SMEs in Tajikistan – Overview of the Sector, Main Trends and Business Expectations


Chapter 2 - Registration


2

Chapter 2 - REGISTRATION Key Survey Findings --

The direct cost of registration procedures to the overall SME sector was $1.4 million in 2007.

--

SMEs spent more money on registration in 2007 than in 2005, even though no legal or regulatory changes explain the increase. Registration costs show wide variation among regions of Tajikistan, suggesting that officials in different areas do not share the same interpretation of the rules.

--

--

The average cost of registration for individual entrepreneurs was 137 somoni (about $40) in 2007, below the average registration cost in 2002 but 20 somoni higher than in 2005.

The average cost of registration for small and medium companies more than doubled from 2002 to 2007, reaching 1,031 somoni (almost $300) on average.

In just two years, the cost of registration for dehkan farms almost tripled, from 269 somoni in 2005 to 762 somoni (about $220) in 2007.

SMEs spent less time registering their businesses in 2007 than in 2005. •

The time required to register as an individual entrepreneur has fallen significantly from 2002, when it took 13 days, to just 4 days in 2007.

Small and medium companies waited 16 days from submission of application documents to registration in 2007, an improvement from the 25 days required in 2002 and 2005.

Dehkan farms spent 45 days on registration in 2007, which is still high but nonetheless an improvement from the 78 days needed in 2005.

For dehkan farms, procedures associated with the land use certificate represent 44% of the total cost and 47% of the total time of the registration process.

In recent years, the registration process in Tajikistan continues to undergo reforms that impact the SME sector in different ways. Individual entrepreneurs, small and medium companies (legal entities), and dehkan farms face different requirements and procedures for registration. Registration for individual entrepreneurs can be completed in just one day with a limited amount of financial resources. This simplicity is important, given that de facto individual entrepreneurs renew their registration every year. Legal entities, on the other hand, face a more complicated and not always transparent procedure that involves multiple steps at various agencies. This necessarily extends the time needed to start up their business activities, resulting in additional costs in both official and unofficial payments as well as lost business opportunities. Dehkan farms register as individual entrepreneurs,1 with the additional requirement of obtaining the right to use the land as a prospective farm. This is a largely non-transparent step representing a significant barrier to entry for a potential farm by increasing the amount of time and (unofficial) cost for farmers wishing to start up 1

38

Unless they decide to operate as legal entities, in which case they are considered companies in the field of agriculture.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

a new activity. The situation in 2007 is worse than in 2002 in terms of the duration of the process. The complexity and opaqueness of the registration procedure appear to be the main drivers of unofficial payments. The SMEs who resort most frequently to unofficial payments are small and medium companies, who face the most complicated procedure. The implementation in July 2009 of a “one-stop shop” for business registration simplified the procedures involved in business registration, although some aspects of the one-stop shop have not yet been implemented. For example, the new Single Registration Number has not yet been aligned with the various other business identification numbers used by the Tax Committee, the Social Security Fund, and the State Statistics Committee. The information presented in this chapter refers to the registration steps required before the implementation of the one-stop shop.

2.1 - Legal Framework: Registration Procedures Vary by Legal Form Registration with the relevant state bodies is the first step that all entrepreneurs must take to legalize the status of their business. Although it is a common requirement for all SMEs, it is not a common procedure for each type of business. There is a different registration system for individual entrepreneurs, dehkan farms, and legal entities. Registration is governed in Tajikistan by a set of legal acts that seek to unify the legislative foundation of state registration of business entities: 1. Registration of individual entrepreneurs is mainly regulated by the Procedure for “Issuing a Patent and an Individual Entrepreneur Certificate to Individuals, Operating without Forming a Legal Entity”; 2. Registration of dehkan farms is regulated mainly by the Law “On a Dehkan Farm”; 3. Registration of legal entities is regulated mainly by the Law “On the State Registration of a Legal Entity”; and 4. The May 2009 Law on “On State Registration of Legal Entities and Individual Entrepreneurs” introduced the one-stop shop. Some additional aspects are also regulated by other legislative acts (see box 2.1). This survey covers the registration procedure in its various stages. There are preparatory steps carried out before registration. There is the state registration itself, which legalizes the start of the en-

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

39


2

BOX 2.1 - Other normative acts regulating the registration process in Tajikistan Codes: 1.

The Civil Code – came into force January 1, 2000;

1.

Law No.46 “On the State Protection and Support to Entrepreneurship in RT,” May 10, 2002;

2.

The Tax Code – came into force January 1, 2005.

trepreneur’s operations with the authorized state body: the Tax Committee for individual entrepreneurs and dehkan farms and the Ministry of Justice for legal entities (small and medium companies). After state registration, there are additional post-registration procedures to be completed. These post-registration steps provide information to the government for statistical and taxation purposes. The choices available to individual entrepreneurs at registration have been recently reformed in Tajikistan. In May 2008, the Government of Tajikistan approved new rules on “Issuing a Patent and Certificate to Individuals, operating without forming a legal entity” (№ 273). The new patent makes tax compliance easier and was developed in coordination with IFC, following recommendations contained in the IFC SME Survey 2006 report. At the same time, the certificate regime was made more complicated, by introducing an alternative choice for individual entrepreneurs operating under certificate (with tax obligations calculated based on turnover as opposed to the original tax obligations based on profit). See Chapter 7 on taxation for a full description of the reform and the current system. The “calculation index” became effective July 1, 2008. This indicator replaced the minimum monthly wage as the basis for calculating the fees of registration and other procedures. This change is also consistent with IFC recommendations, as it allows the government to raise the minimum wage without simultaneously increasing the cost of administrative procedures for businesses.2

2.2 - Registration of Individual Entrepreneurs Starts with Choice of Patent or Certificate Anyone wishing to start a business in Tajikistan can register as a legal entity (covered in the next section) or as an individual entrepreneur. If the potential entrepreneur decides not to become a legal entity, he or she has 2 choices for operation as an individual entre-

2

40

From April 1, 2006 to July 1, 2008, the minimum monthly wage was set at 20 somoni. The calculation index is fixed annually in the Law on the State Budget. For fiscal year 2008, this unit was set at 25 somoni. Effective July 1, 2009, the calculation index is 35 somoni.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

preneur: a patent or a certificate.3 This choice imposes differences in operations and in taxation.4 The essential operational differences are that individual entrepreneurs working under a patent may not hire employees or conduct international trade, their annual turnover can be a maximum of 200,000 somoni (about $58,000), and they are limited to the economic activities and geographical area listed on their patent. Certificate holders can hire employees, engage in international trade, conduct any economic activity that is not prohibited, and work anywhere in Tajikistan. The patent’s principal advantage is that it dramatically simplifies determination of the entrepreneur’s tax obligations. The cost of the patent incorporates personal income tax, retail trade tax and social tax. Patent holders do not pay VAT or the road users’ tax. The cost of a patent is fixed, depending on the business activity category and the region. The maximum patent price is 240 somoni (about $70), for transportation of oil, liquid gas and cement by specialized transport, and the minimum patent price is 30 somoni (about $9), for transportation by motor-scooter. The average certificate costs 164 somoni. In addition, certificate holders are required to pay personal income tax (either the advance minimum tax on revenues or turnover tax), retail trade tax, social tax, VAT and the road users’ tax. Registration for individual entrepreneurs, whether they want to work under patent or under certificate, takes place at the tax office. See figure for an overview of the registration process. Foreign nationals wishing to begin business operations as an individual entrepreneur go through the same steps as Tajik citizens, although they are required to provide registration documents from the Ministry of Foreign Affairs (MFA) or the Republican Department for Visa and Registration (OVIR) at each step.

Registration occurs at the tax office Before applying to the tax authorities for a patent or certificate, the entrepreneur is required by law to obtain an identification number from the tax authorities and a social identification number (SIN) from the Social Security Fund. In practice, individual entrepreneurs do not generally visit the Social Security Fund or obtain a SIN. Shortcomings in administration 3

Civil Code Article 24 forms the legal basis for a patent, and Tax Code Article 137 forms the legal basis for a certificate.

4

See Chapter 7 on Taxation for a full description of the differences between a patent and a certificate.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

41


2

Figure 2.1 - State registration of individual entrepreneurs in Tajikistan Step 1: Tax Authority

Step 2: Social Security Fund

• Passport & 2 photos • Proof of real estate tax payment

• Passport • INN • Patent or certificate

No official fee

No official fee

INN

SIN

Step 3: Tax Authority • Passport & 2 photos • INN & SIN copies • Payment order for patent or certificate • Payment order of state registration fee and patent/ certificate form fee Patent cost + 25 TJS fee for patent form

Step 4: State Statistics Agency • Passport & 2 photos • Patent or certificate

Step 5: Ministry of Industry • OKPO • SIN

Step 6: Bank • OKPO • SIN

3 MMW = 60 TJS

No official fee

OKPO

Legal Seal

Bank account

Patent or Certificate

Pre-registration

State Registration

Not part of registration - optional

Notes:

Legend:

Step 1 requirement to present proof of real estate tax liabilities is required in practice, but not by law. Step 2 is required by law, but is not performed or required in practice for patent or certificate holders. Step 4 used to be but is no longer required by law.

CI = Calculation Index (now 35 TJS) INN = Taxpayer identification number MMW = Monthly Minimum Wage = 20 TJS in 2007 OKPO = General Classifier for Enterprises and Organizations SIN = Social Identification Number TJS = Tajik Somoni

Step #: Location • Requirements from entrepreneur Amount of official fees Outcome

of the social fund may make it more difficult for some individual entrepreneurs to receive their pension (see box).

Box 2.2 – Poor administration of the Social Identification Number may lead to pension problems The social identification number (SIN) is designed to track individual tax contributions to the social fund, allowing participants to receive a pension upon retirement or access other benefits. Unfortunately, the system does not work well in practice. The tax authorities do not oblige entrepreneurs to obtain the SIN, thus entrepreneurs do not usually obtain it. Even if an entrepreneur gave his or her social identification number to the tax authorities, their contributions to the social fund would not be recorded under their individual SIN. To receive a state pension, the individual entrepreneur must save all receipts of payment of the social tax. At age 65, he or she can bring those receipts to the tax authorities and ask for a letter or certificate verifying that they have paid social tax for a given number of years. The entrepreneur can bring that letter or certificate to the Social Security Fund, and determination of the pension is at the discretion of the head of the agency. Today, individual entrepreneurs visit the Social Security Fund only rarely. There are two practical purposes for the SIN. Individual entrepreneurs must present a SIN to open a bank account. Also, extremely rarely, they apply to the Ministry of Internal Affairs for approval to make an official seal. This is a legal right but not an obligation, and it requires a SIN.

As amended in the June 2008 government decree revising the patent,5 the tax authorities no longer require patent and certificate applicants to present their OKPO code. The OKPO (a Russian acronym for General Classifier for Enterprises and Organizations) is obtained at the State Statistics Committee, which keeps track of the number of individual entrepreneurs, legal entities and other entities in Tajikistan. 5

42

№ 273.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

Given the practical elimination of the visit to the Social Security Fund and the visit to the State Statistics Committee, an individual entrepreneur can now complete all registration at the tax office in one day. There are no legally required steps that an individual entrepreneur must take after registration with the tax authorities. After registration some individual entrepreneurs choose to open a bank account (about 7%, see Chapter 5), or, much less often, obtain a legal seal. Both activities require an OKPO code. Thus, some individual entrepreneurs do obtain the OKPO from the State Statistics Committee. Officials at the State Statistics Committee complain that it is becoming increasingly difficult to keep accurate count of registered businesses as fewer individual entrepreneurs obtain the OKPO, and they hope that introduction of the one-stop shop for business registration will help them improve their records. As indicated in the SME Overview, 78% of individual entrepreneurs are traders. Many of them work at large markets in urban areas. While there are no tax offices located in markets, there is frequently a tax official who is assigned to supervise tax compliance among vendors at a particular market. For a small fee, these officials will complete the patent or certificate registration process for an individual entrepreneur, saving the entrepreneur a trip to the tax office. In practice, anecdotal evidence suggests that the prices the tax officials in the markets charge for the patent do match the new rate structure which came into effect in July 2008.

Survey findings: Individual entrepreneurs register their businesses quickly This survey was carried out in the fall of 2008, but it asked respondents about their experiences during the year 2007. Thus, individual entrepreneurs described the period before the July 2008 patent reform. The next IFC SME Survey will demonstrate the effects of the new patent on the registration process. The time required to register as an individual entrepreneur has fallen significantly from 2002, when it took 13 days (see chart 2.1). The registration process now takes just 4 days for patent holders and 5 days for certificate holders, for an average of just over 4 days for the individual entrepreneur segment of the SME sector in 2007. Chart 2.1 – Number of days spent by the average individual entrepreneur on registration Among individual entrepreneur respondents in the given year 13

2002

5

4

2005

2007

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

43


2

The average cost of registration for individual entrepreneurs has increased from 117 somoni in 2005 to 137 somoni (about $40) in 2007 (see chart 2.2). This remains below the average registration cost in 2002, and it is low enough that it imposes only a moderate barrier to entry. Further, the July 2008 introduction of a simplified pricing structure for the patent introduced much more certainty into official fees and other aspects of the registration process for patent holders. Chart 2.2 - The average individual entrepreneur spends 137 somoni (about $40) to register their business Cost in somoni of registration for individual entrepreneurs, including official and unofficial costs 178 117

2002

2005

137

2007

As indicated in the previous section, individual entrepreneurs can work under patent or certificate. The official price for a certificate is 25 somoni, although focus group participants indicate that they must prepay several months of taxes at registration. There is little concrete information available to aspiring certificate holders on how this tax prepayment is calculated or recorded. Chart 2.3 - Certificate holders spent 42 somoni (about $12) more on registration than patent holders Among individual entrepreneur respondents in 2007, registration cost in somoni including official and unofficial costs Certificate: 164 Patent: 122

2007

Individual entrepreneurs can register at any tax office in the country. Certificate holders are authorized to work anywhere in Tajikistan. Patent holders can also register to work anywhere in the country, or they can select one or more regions.

Regional variation in registration costs is greater than expected The price of a patent is determined not only by the activity to be undertaken by the entrepreneur, but also by the region in which he or she will work. The base cost of the patent is multiplied by a zonal

44

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

coefficient. Beginning in July 2008, the coefficient ranges from 0.6 for rural areas to 1.2 for Dushanbe.6 See Attachment 2.1 for the current set of zonal coefficients. For example, a patent to work as a taxi driver in Istarafshan currently costs 88 somoni per month (about $25), equal to the base price of a patent for passenger transportation by automobile (80 somoni) times a regional coefficient of 1.1. Beyond the zonal coefficient in the patent prices, there should be no official difference in registration cost among regions. However, individual entrepreneurs in different locations pay very different amounts to register (see chart 2.4). One would expect business registration costs to be highest in Dushanbe, on account of the zonal coefficient, yet it costs less than 98 somoni for the average individual entrepreneur to register. Instead, survey respondents in Sughd, the industrialized northern oblast, report significantly higher registration costs than those in the rest of the country. Chart 2.4 - Individual entrepreneurs in Sughd oblast spent double what their counterparts in Dushanbe did on registration Among individual entrepreneur respondents in 2007, registration cost in somoni including official and unofficial costs Cost of procedure, TJS

Cost of procedure as % of turnover

120

98

89

DRS B Average # of days for registration

4.0

2.8 87

0.9

0.9

0.8

0.3

132

121

4.5

197

1.2

DRS A

Dushanbe

Kulyab

Kurgan-Tube

Sughd

GBAO

4.2

2.2

4.0

3.9

5.5

3.1

The frequency of unofficial payments has significantly decreased from 2002, when 1 in 3 individual entrepreneurs reported using unofficial methods during the business registration process. Now only 1 in 10 individual entrepreneurs does (chart 2.5).

6

In 2007, the zonal coefficient was 0.8 for remote areas (i.e. DRS), and 1.15 for administrative centers and Dushanbe.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

45


2

Chart 2.5 - The rate of unofficial payments in the registration process appears to be falling for individual entrepreneurs Among all individual entrepreneur respondents, the percentage who report making unofficial payments during registration 33 25 10

2002

2005

2007

There is significant regional variation in the reported frequency of unofficial payments. Fewer than 10% of individual entrepreneurs report making unofficial payments in the registration process in DRS B, GBAO, Dushanbe, and Sughd oblast. Yet in southern Tajikistan, these percentages are much higher. Fully half of individual entrepreneurs from Kulyab report making unofficial payments during the registration process. As chart 2.6 shows, the incidence of unofficial payments is not related to the reported cost of registration. Chart 2.6 - Regional differences in the reported frequency of unofficial payments bear little relation to the cost of registration for individual entrepreneurs Among all respondents who underwent registration procedure, the percentage who report making unofficial payments 50

200 180 160 140 120 100 80 60 40 20 0

24 10

8 Sughd

Kurgan-Tube

Kulyab

DRS A

5 Dushanbe

Cost of registration in somoni

0 DRS B

2 GBAO

Unofficial payments in %

2.3 - Registration of Legal Entities (Small and Medium Companies) Is Complicated and Confusing The registration process for legal entities is significantly more complicated than the process for individual entrepreneurs. See figure for a depiction of business registration for legal entities as prescribed by the 2003 law on “Registration of Legal Entities.� Foreign nationals wishing to form a legal entity go through the same steps as Tajik citizens, although they are required to provide registration documents from the Ministry of Foreign Affairs (MFA) or the Republican Department for Visa and Registration (OVIR) at each step.

46

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

Figure 2.2 - State registration of legal entities in Tajikistan See figure 2.1 for the legend On May 24, 2009, the Parliament adopted a law on “On State Registration of Legal Entities and Individual Entrepreneurs”. The survey asked respondents about their experience registering a business before this law was passed, thus the procedures described here do not take into account the May 2009 legislation. Step 1: Notary • Company statutes

Step 2: Tax Committee

Step 3: Local Khukumat

• Tax inspection

• Rental agreement or house register • Statement on lack of debt

• Chartered capital

Step 4: Bank

Step 5: State Savings Bank

3% CI per signature, 2% CI per page

No official fee

No official fee

250 TJS

16 CI

Notarized company statutes

Statement on lack of debt

Statement on Location

Temporary account

Payment order: state fee for registration

Step 6: Ministry of Justice • Passport & 2 photos • Notarized company statutes • Statements on lack of debt and location • Proof of payment of chartered capital • Payment order for state registration fee and form fee [Fee paid already at State Savings Bank] Registration certificate

Pre-registration

Step 7: Notary • Registration certificate

Step 8: Statistics Committee

Step 9: Ministry of Industry

Step 10: Seal company

• Notarized company statutes • Passport & 2 photos

• OKPO

2% CI

3 CI

4 notarized copies of registration certificate

OKPO

1.5 TJS Permit to make seal

State Registration Step 13: Local Khukumat

Step 11: Tax authority

Step12: State Social Fund

• Permit to make seal

• Passport &2 photos • Proof of real estate tax payment

• Notarized constitutive document • OKPO & INN • Letter verifing legal address • Staff record log by company accountant

30 TJS

No official fee

No official fee

No official fee

Seal

INN

SIN

General license

Post-registration

Step 14: Bank • OKPO

Bank account

Not part of registration - optional

Legal entity registration begins with the preparation of company statutes, listed in box 2.3. After gathering the documents, the company founders must visit the following: 1. Notary: to verify the signatures of constitutors on the documents 2. Tax office: to obtain confirmation letter (spravka) confirming the absence of debt for the premises 3. Local Khukumat: to obtain confirmation letter (spravka) on future location of the entity’s premises 4. Bank: to establish temporary account with minimum starting capital 5. Amonatbonk (the state savings bank): to pay and obtain re-

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

47


2

ceipt or copy of a bank order confirming the payment of the state registration fee Box 2.3 - The company statutes 1.

Articles of association

2.

Decision on establishment of legal entity or minutes of meeting

3.

If one of the constitutors is a legal entity, then notification from Ministry of Justice on state registration

4.

Curriculum vitae of each of the constitutors

Some required documents are economically unnecessary The two confirmation letters are burdensome and economically unnecessary: the information letter (spravka) on lack of debt of the future premises, and a second information letter confirming the legal address and location of the company from an authorized state organ. The two procedures take up to 4 days, according to the World Bank Group’s Doing Business 2009 report. To receive the first letter, the company founders must arrange for a tax inspection. If no debt exists, the confirmation letter is issued by the tax authorities. From the khukumat, the company founders must obtain a second information letter confirming the legal address and location of the company. The khukumat requires an application; documents on the company premises, such as a rental agreement or a house register (domovaya kniga); and the confirmation letter from the tax inspection, confirming the absence of debt for the company premises. The purpose of proving a legitimate legal address and paid taxes and fees for the premises is to provide an assurance that the company is real, and not just a shell registered for fraudulent purposes. While this might be a reasonable concern for some companies, the majority of newly registered entities are registered for the sole purpose of doing business. The assumption to perceive every new company as a potential fraudulent player, and therefore impose a higher set of standards, such as the proof of paid taxes and legitimate legal address, might discourage some companies from entering the formal economy. Moreover, the registry’s function is to register companies and not to investigate or persecute criminal activity, nor to assume that the companies are not legitimate by asking them for a proof of address and paid taxes.

48

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

Businesses benefit from reduced minimum capital requirement In a major improvement for businesses, the government lowered the minimum starting capital requirement from 8,000 to 500 somoni (about $144).7 The paid-in minimum capital requirement was set at 250 somoni, and this amount must be paid within one year of the company’s inception. The state registration fee is 340 somoni. This includes the registration fee itself, which is 15 minimum wages (300 somoni), and a fee for the registration form, which is 2 minimum wages (40 somoni).8 State registration for legal entities takes place at the Ministry of Justice. In accordance with the 2003 Registration Law, if the set of company statutes is complete and accurate, the Ministry of Justice is to process the application in ten days or less. The company founders are required to take several steps after registration at the Ministry of Justice: 1. Notary: to make official copies of company statutes 2. State Statistics Department: to obtain OKPO code (in other words, to become part of the Tajik enterprise register) 3. Ministry of Interior: to obtain permit for fabrication of official seal 4. Seal company: to order an official seal 5. Tax office: to register as a taxpayer and obtain identification number 6. Social Fund: to register as social taxpayer and obtain identification number Most legal entities also establish a bank account, although this is not required. After registration, the company founders can unblock the chartered capital. Among the requirements of the bank for an account is the OKPO code from the State Statistics Committee.

Permission from the local khukumat is a major obstacle The legal entity must also obtain permission (general license) from the local khukumat to operate, even though this obligation is not set forth in the law. According to the World Bank Group’s Doing Business report, this is the most time consuming part of the en7

Amendment to the Limited Liability Companies Law (No: 429) signed by the President on October 6, 2008.

8

Doing Business 2009

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

49


2

tire registration process, at twenty days. There is no official price for this document, and unofficial solutions are common practice. This requirement should be removed and replaced with an ex ante system of specific sectorial licensing when needed. For this purpose, clear criteria should be developed and introduced for licensing of only such activities that may impose hazard to the environment, health, and public safety.

Survey findings: Small and medium companies face high and rising costs of registration Survey results demonstrate that the registration process has become faster since 2002 for small and medium companies, although registration costs are now much higher. This survey asks respondents about how many days the registration process took, after presentation of their application to the Ministry of Justice. In other words, the pre-registration steps (such as developing company statutes, obtaining confirmation letters, and depositing minimum starting capital) for a small and medium company are not counted in this survey. Neither are the post-registration steps (such as taxpayer registration and making of the company seal). The survey results show that time of registration has significantly decreased (see chart 2.7). Respondents said that in 2007, it took 16 calendar days from the time their application was presented to the Ministry of Justice until they were registered. This is an improvement from 25 days in 2002 and 2005. Chart 2.7 - Number of days spent by the average small and medium company on registration Among all small and medium company respondents in the given year 25

25

2002

2005

16

2007

According to the Doing Business 2009 report, the pre- and postregistration steps can be completed in a minimum of 17 days. Thus, the entire registration process takes at least 33 days. While it now takes less time to register as a legal entity, it unfortunately is now much more expensive than in 2002 or 2005. In just five years, the cost of registration has more than doubled (chart 2.8). Survey respondents indicate that in 2007, it cost on average 1,031 somoni (about $298) to complete the registration process. There were no legislative or regulatory changes that account for this

50

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

increase. IFC analysis of the data by region (urban versus rural), by economic sector, and by other factors was unable to account for or satisfactorily explain this increase in cost. This unexplained increase in costs suggests that the incidence of unofficial payments may be higher than survey respondents report (see discussion of unofficial payments below and chart 2.10). Chart 2.8 - The (official and unofficial) cost of registration for small and medium companies Cost in somoni, among all small and medium company respondents in the given year 1,031 745

487

2002

2005

2007

Local officials determine the cost of registration differently The registration process for small and medium companies involves the local khukumat office in two steps: the pre-registration confirmation letter on the future premises, and the post-registration permission to operate. The other steps in the process involve national government bodies. There is no zonal coefficient or other reason why registration should cost more in one location than another, suggesting that the frequency of unofficial payments is higher than reported. Chart 2.9 – Regional differences are significant in the (official and unofficial) cost of registration for small and medium companies Among small and medium company respondents in 2007, registration cost in somoni including official and unofficial costs Cost of procedure, TJS

Cost of procedure as % of turnover

1,354

1,540

1,586 13.9

18.2 1,764

11.8

863

753

6.2

463 4.2 2.4

2.1 Kurgan-Tube Average # of days for registration

9.2

Dushanbe

DRS A

GBAO

Sughd

Kulyab

DRS B

14.2

15.2

26.2

19.2

24.4

24.9

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

51


2

Survey respondents from different regions report paying dramatically different costs for business registration (chart 2.9). Company founders pay the least for registration in Kurgan-Tube (463 somoni). The Ministry of Justice in Kurgan-Tube city is the only registration point for the whole Khatlon region. Survey respondents from Kulyab, the other half of Khatlon region, report spending more than three times that much on registration. This may reflect higher unofficial costs imposed by the local khukumat, and it may also refer to additional travel costs incurred on the trip to Kurgan-Tube. Company founders in Dushanbe pay a relatively low cost to register their businesses. Entrepreneurs coming from DRS districts must register at the Ministry of Justice in Dushanbe. As in Khatlon region, the company founders may be paying more because of travel costs or because of more expensive interactions with the local khukumat authorities. In Sughd and GBAO regions, registration is undertaken in the cities of Khujand and Khorog respectively. The cost of registration in these cities is also almost twice what it is in Dushanbe. Like individual entrepreneurs, small and medium companies also report making unofficial payments much less often than in 2002 or 2005. In the past two surveys, the frequency of unofficial payment was constant at 44% of respondents, yet in 2007 only 16% of small and medium companies report making unofficial payments (see chart 2.10). Given the large and unexplained increase in the cost of registration, it may be that small and medium companies have become less comfortable admitting to making unofficial payments. Chart 2.10 - The frequency of unofficial payments in the registration process appears to be falling for small and medium companies Among all respondents who underwent registration procedure, the percentage who report making unofficial payments 44

44 16

2002

52

2005

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

2007


REGISTRATION

2.4 - Registration of Dehkan Farms Is Dependent on the Local Land Committee “Dehkan farm” is a term for an individual or family farm in Central Asia. Tajik legislation provides only a vague definition of a “dehkan farm” – “an independent form of business entity possessing equal economic rights with commercial and individual entities.”9 The Law on Dehkan Farms indicates that farmers have the option to form a legal entity, or they can operate under certificate without forming a legal entity. There are a total of five business structures available for dehkan farms (see figure). Figure 2.3 – The five different legal business structures for dehkan farms

Dehkan Farms

Registered under Certificate

Individual Entrepreneurship

Family Entrepreneurship

Registered as Legal Entity

Simple Partnership

Business Partnership

Production Co-operative

In Tajikistan, land is owned by the State. Private individuals can receive long-term use rights including perpetual use, life-long inheritable use, fixed term use, or lease.10 Among dehkan farms, only those operating as an Individual Entrepreneur (not Family Entrepreneurship or Simple Partnership) can receive life-long inheritable use. The other four categories of dehkan farms receive land for fixed term use. Three types of dehkan farms operating under a certificate, without forming a legal entity: •

Individual entrepreneur: One farmer has lifelong right to use the land parcel and inheritance rights. The farmer may hire seasonal workers by contract, as per the Labor Code.

Family entrepreneurship: A group of family members farms their land plots together. Each member is supposed to have his or her own “land pie right”, in case the member leaves the group and wants to farm his or her own land separately.

9

№173 from 03 March 2006.

10

Land Code Articles 11 through 14

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

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2

•

Simple partnership: A group of people farms their land plots together. This form is rarely used.

Two types of dehkan farms operating as legal entities: •

Business partnership: A group of people have shares in the farm. This form was used to reorganize Soviet collective farms.

•

Production co-operative: Same as the business partnership, except this business is allowed to process their agricultural products.11

Dehkan farms operating under certificate are required to register with the tax authorities. Dehkan farms who choose to form legal entities are required to register with the Ministry of Justice. The large majority of farmers opt for the easiest and least costly registration as certificate holders. For example, in Vakhdat district near Dushanbe, there are about 3,400 dehkan farms. Only 23 of them are legal entities (17 business partnerships and 6 production co-operatives). The local Land Committee in Vakhdat registers up to 500 dehkan farms a year. Regardless of the chosen business structure, all dehkan farms must obtain a land use certificate before registration. See steps 1 through 5 of figure 2.4. The land use certificate is the most difficult part of the entire registration process.

The land use certificate presents numerous obstacles A major problem in obtaining the land use certificate is acquiring the cadastre map of the plot of land of the farm from the RayKomZem (Local Land Committee). These maps are usually more of a sketch than a map, often with neither map scale indication nor northorientation and showing incomplete measurements between lot corners. Most of the cadastral maps currently available are maps of the former kolkhozes and sovkhozes, dating back to the 1940s when these farms were originally established. The Law on Dehkan Farms does not prescribe time limits for the various pre-registration steps involved in obtaining the land use certificate. For example, obtaining the approval of the chairman of the khukumat, the decision on land allocation, can take two years or more. The local khukumat is not authorized to receive official fees, but unofficial solutions are widespread and directly affect the speed of the land use certificate processing.12

54

11

IFC could not identify a legal reference for this distinction.

12

Source: Interviews with dehkan farm representative groups and with local officials involved in land use certificate process.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

Figure 2.4 - State registration of Dehkan Farms in Tajikistan See figure 2.1 for the legend Step 3: Local Khukumat

Step 4: Dushanbe Land Committee

Step 5: Local Land Committee

Step 6: State Statistics Agency

• Decision from Chairman of Khuhumat

• Land Boundary Plan

• Decision on land allocation • Land Boundary Plan

• Land Use Certificate • Land Boundary Plan

• Passport & 2 photos • Land Use Certificate

No official fee

No official fee

No official fee

43 somoni

43 somoni

1 MMW = 20 TJS

No official fee

Chairman of Khukumat sends Land Committee

Sends Land Boundary Plan to Khukumat

Decision on land allocation

Sends Land Use Certificate to Local Committee

Physical mapping out of land plot

OKPO

INN

Step 1: Local Khukumat

Step 2: Local Land Committee

• Application for allocation of land

Step 7: Tax Committee • Passport & 2 photos • Proof of real estate tax payment

Pre-registration Step 8: Tax Committe • Passport • INN & OKPO copies • Decision on land allocation

Step 9: State Social Fund

Step 10: Local Jamoat

• Notarized constituve document • OKPO & INN • Letter verifying legal address • Staff record log by company accountant

• OKPO • Land Use Certificate

25 somoni Certificate fee

No official fee

No official fee

Registration certificate

SIN

Registration in logbook

State Registration

Step 11: Bank

Post-registration

Bank account

These are the steps for a dehkan farm registering as an individual entrepreneur. Dehkan farms registering as a legal entity go through steps 1-5 to get Land Use Certificate, plus all steps required for a legal entity (see other figure).

Not part of registration - optional

Besides the land use certificate, there are a few other differences for dehkan farm registration procedures as compared to registration for other certificate holders (i.e. individual entrepreneurs): 1. The tax office requires the OKPO from the State Statistics Committee. 2. The fee for state registration is only one times the minimum monthly wage, not three times the minimum monthly wage as paid by other individual entrepreneurs. 3. After state registration, the dehkan farm is required to register with the local jamoat (a local government structure below the khukumat level). Dehkan farms registered as legal entities follow the same procedures as regular legal entities, including the requirements to produce a seal and establish a bank account. Legal entities also pay one times the minimum monthly wage fee, and are required to register with the local jamoat.

Survey findings: Dehkan farms report dramatically higher registration costs than in 2005 Survey results indicate that the dehkan farm registration process is significantly shorter in 2007 than in 2005, falling from 78 to 45 days (chart 2.11). However, registration in 2007 still took longer than the average 36 days reported in 2002.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

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2

Chart 2.11 - Number of days spent by the average dehkan farm on registration Among all respondents who underwent registration procedure 78 45

36

2002

2005

2007

As chart 2.12 shows, the time required to register a dehkan farm varies from 16 days in GBAO up to 65 days in DRS B (the eastern districts of Vahdat, Rudaki, Faizabad and Varzob). Chart 2.12 – Regional differences in the length of the registration process for dehkan farms Number of days, among all respondents who underwent registration procedure

29

16 GBAO

KurganTube

43

45

45

Sughd

DRS A

Average

65

56

Kulyab

DRS B

Similar to the situation for small and medium companies, it is now much more expensive to register as a dehkan farm than in 2002 or 2005. In just two years, the cost of registration has almost tripled (chart 2.13). Survey respondents indicate that in 2007, it cost on average of 762 somoni (about $220) to complete the registration process, compared to 269 somoni in 2005. There were no legislative or regulatory changes that account for this increase, suggesting that unofficial payments are a major factor in the cost of dehkan farm registration. Chart 2.13 - The (official and unofficial) cost of registration for dehkan farms Cost in somoni, among all respondents who underwent registration procedure 762

419 269

2002

2005

2007

The time and cost associated with the overall registration process of a dehkan farm varies significantly by region (chart 2.14). The dehkan farm registration process cost the most in DRS B and the least in Kulyab.

56

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

Chart 2.14 – Regional differences in the cost of registration (official and unofficial) for dehkan farms Among dehkan farm respondents in 2007, registration cost in somoni including official and unofficial costs 1,181 20.0

903

743

736

692 491

5.2

Kurgan-Tube Cost of procedure, TJS

7.8

DRS A

10.4

9.0

Kulyab

Sughd

10.6

DRS B

GBAO

Cost of procedure as % of turnover

Obtaining the land use certificate takes about half the time and cost of registration Almost half of the total cost and time required to register as a dehkan farm is spent on obtaining the land use certificate, a procedure not generally required of individual entrepreneurs or small and medium companies. Local authorities, namely the khukumat and the land committee, play an active role in the provision of land use certificates, thus regional variation in the land use certificate drives the regional variation observed above in the overall process (see chart 2.15). Dehkan farms report spending an average of 21 days obtaining the land plot, equivalent to 47% of the overall registration process. Obtaining the land use certificate cost an average of 337 somoni ($97), or 44% of the overall cost of registration. Obtaining the land use certificate is most burdensome in DRS B, where it both takes the longest (39 days) and costs the most (590 somoni). Like the overall registration process, the process to obtain a land use certificate is shortest in GBAO (10 days) and least expensive in Kulyab (207 somoni).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

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2

Chart 2.15 – Time and cost to obtain a land use certificate in 2007 Among all dehkan farm respondents 590 502

39

415 339 245

24

207 17

18

20

10 GBAO

Kulyab

Kurgan-Tube

Sughd

Cost of obtaining land use certificate, TJS (incl. preparation and submission of all necessary documents)

DRS A

DRS B

Cost of procedure as % of turnover

The 2007 survey did not ask dehkan farms about whether or not they made unofficial payments in the registration process, and therefore there is not comparative data on this indicator.

2.5 - Recommended Policy Options: Simplified registration procedures Many countries around the world have chosen to make it easier to start a business by introducing a “one-stop shop.” This means that the potential entrepreneur can perform all or virtually all steps required to register by visiting one office during one visit. Officials at the one-stop shop then coordinate with other government agencies involved in the registration process, saving the entrepreneur time and reducing confusion and the opportunity for informal payments. According to the World Bank Group’s Doing Business report, this is the most common reform among the several areas covered by the report. The government of Tajikistan has been working actively to streamline business registration via a one-stop shop. Encouraged and facilitated by the international community (particularly the European Commission, an initiative to create a one stop shop system for business registration (as well as business closure or change of business address) led to implementation at 74 tax offices, beginning in July 2009. The one-stop shop is now the sole focal point for entrepreneurs to register and start a business, whether they are individual entrepreneurs or legal entities. A key component of the reform was the May 2009 law on “On State Registration of Legal Entities and Individual Entrepreneurs” which foresees: the establishment of a one-stop shop, introduction of the “silence is consent” principle, removal of the notarization and company seal requirements, the introduction of stan-

58

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

dardized application forms and a more detailed list of required documents for registration. The law addresses the registration process for individual entrepreneurs (patent and certificate), legal entities, subsidiaries and representative offices of foreign companies, and farmers who have a land use certificate. The law also introduced a new Single Registration Number for businesses, which would replace the various other business identification numbers used by the Tax Committee, the Social Security Fund, and the State Statistics Committee. The three agencies have information technology systems which are currently incompatible and require various levels of upgrading in order to reconcile old identification numbers with the new Single Registration Number. As part of the new registration procedures at the one-stop shop, businesses now receive a Single Registration Number, but they also receive the Taxpayer Identification Number as before. Unfortunately, the new law also requires all businesses to re-register within one year. While they do not have to pay the state registration fee again, this process is creating confusion among business owners and could lead to significant delays in processing applications by tax officials. Even after full implementation of the 2009 law on business registration, the government can take additional steps to simplify the registration process. In Tajikistan the current paid-in minimum capital of TJS 500 (about $140) equals 13.5% of annual income per capita and still constitutes a barrier to starting a business for many entrepreneurs. The minimum starting capital requirement should be removed entirely. In theory, minimum starting capital provides some assurance to investors that a business has sufficient funds to operate. In practice, businesses can gather enough money to meet this requirement, place it in the bank, register, and then immediately take the money back out of the bank. Most countries do not require a minimum capital for limited liability companies at all, including the United Kingdom and France, which originally introduced it.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

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2

Recommendations 1. Implement the one-stop shop with a vision for additional reform beyond initial simplification. •

Conduct a public awareness campaign to inform potential entrepreneurs about the new, simplified procedures.

Make the one-stop shop accessible online for all relevant state agencies, by creating the “Single State Register” of companies and entrepreneurs.

In the long term, create an electronic version of the one-stop shop for potential entrepreneurs.

2. Extend the deadline for re-registration of existing businesses, or better, remove this requirement entirely. 3. Eliminate unnecessary steps in the registration process, which create additional burdens on entrepreneurs without leading to economic benefits: •

Eliminate the minimum starting capital requirement.

Eliminate the requirement to obtain confirmation letter (spravka) from the tax authority confirming the absence of debt for the premises and information letter (spravka) confirming the legal address and location from the khukumat.

Eliminate the approval (general license) of the local authorities (Khukumat).

4. Review the allocation process for land use certificates, seeking ways to reduce the discretion of local government officials. 5. Complete necessary technical upgrades to allow the Tax Committee, State Statistics Committee, and Social Security Fund to share information effectively about registered businesses and to implement the Single Registration Number. 6. Introduce and make available on-line and on site standardized company incorporation forms and Articles of Association. The State Registry should provide standard models of charter documents for free on ordinary paper, and online in addition for easier access. 7. Develop a roadmap for reform of the social security fund, to ensure that individual social fund contributions are tracked effectively and that benefits are distributed fairly.

60

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration


REGISTRATION

Attachment 2.1 Regional coefficients for patent prices, as of July 1, 2008 Group

Geographical area

Zonal Coefficient

I

City of Dushanbe

1.2

II

Cities of Khujand and Kurgan-Tube

1.15

III

Cities of Istarafshan, Tursunzade, Kayrakum, Vakhdat and Chkalovsk;

1.1

Administrative centers of Rudaki, Hissar, and B.Gafurov rayons Cities of Kanibadam, Isfara, Kulyab and Sarband;

IV

1.0

Administrative centers of Spitamen, J.Rasulov, Rumi, Dangara, Bokhtar and Vakhsh rayons Cities of Rogun, Nurek, Taboshar, and Khorog;

V

Administrative centers of Shahrinav, Faizabad, Varzob, Jilikul, Kumsangir, Pyanj, Qo-

0.85

bodiyon, Shahrituz, Jomi, Khuroson, Vose, Farkhor, Hamadoni, Yavan, Asht, Zafarobod, Mastchok, Ghouchi and N.Khusrav rayons

VI

Other cities and administrative centers of other rayons

0.7

VII

Territory around cities and administrative centers of rayons

0.6

Regional coefficients for patent prices, from March 31, 2004 to June 30, 2008 Group I II III IV

Geographical area Cities: Dushanbe, Khujand, Kurgan-tube and etc. Districts: Rudaki, Hissar and B. Gafurov Cities: Penjikent, Chkavolsk, Kulyab and Vahdat Districts: J.Rasulov, Spitamen Districts: Sharinav, Faizabad, Varzob, Kolkhozobad‌Zafarabad Cities: Rogun, Nurek, Taboshar Cities and District of GBAO, district Rasht, Nurobod, Khovaling, Muminabad, Baljuvon, Temurmalik, Shurabad, Ganchi and Jirgatal

Zonal Coefficient

1.15 1.0 0.9 0.8

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Registration

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Chapter 3 - Licensing


3

Chapter 3 - Licensing Key Survey Findings --

The direct cost of licensing procedures to the overall SME sector was $4.3 million in 2007.

--

The most active licensing bodies for SMEs are the Ministry of Economic Development and Trade, the Ministry of Agriculture and Environmental Protection, and the Ministry of Transport and Communications.

--

Across the SME sector, the licensing process was shorter in 2007 than in 2005. Small and medium companies, however, still waited almost a full month.

--

The average small and medium company who underwent the licensing process in 2007 spent 1281 somoni (about $370) and received an average of 1.4 licenses. This is equivalent to a cost of 944 somoni (about $272) per license, well above the legally defined cost of 300 somoni (about $87).

--

The average validity of a license for small and medium companies is 44 months, more than a three-fold improvement from 2005. For individual entrepreneurs and dehkan farms the average validity of a license remains low at 24 and 12 months respectively.

--

The direct cost of licensing procedures to the overall SME sector was $4.3 million in 2007.

Business licensing is a commonly used form of regulation which affects specified businesses and occupations by regulating entry into markets and conduct within markets. Licensing is one of the strongest tools of state control. Licensing requirements not only impose regulatory compliance burdens (as do most types of regulation), but also can restrict healthy competition by establishing significant and unnecessary entry barriers to particular economic activity and markets. Governments must take care when implementing licensing regulations that they avoid causing excessive damage to business operations and the broader economy. The key risks and costs which can be generated by licensing include: --

unnecessarily restricting entry into a market and/or competition within a market;

--

providing barriers to businesses operating in the informal sector moving to the formal sector;

--

severely limiting the supply of important goods and services (e.g. taxis or medical services);

--

resulting in standards being unnecessarily high and otherwise distortive;

--

being costly and/or difficult for governments to administer and properly enforce; and

--

being misused by governments to provide a highly inefficient and costly way of collecting revenue.1

1

64

“Policy Framework Paper on Business Licensing Reform and Simplification.� The World Bank Group’s Investment Climate Advisory Service. 2009.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


LICENSING

In recent years Tajikistan has made significant progress in reforming its licensing regime. The Law “On licensing certain types of activities” adopted in May 2004 and its later amendments form the legal basis for licensing in Tajikistan. The 2004 Licensing Law improved the licensing regime in the country by setting principles for licensing, clarifying and reducing the types of activity subject to licensing, standardizing the application process and requirements to obtain permits, and setting standard licensing fees. The 2004 Licensing Law reduced the number of activities subject to licensing from almost 1,000 to 115, and amendments in 2006 further reduced the list to 65 activities (see Attachment 3.2). The Licensing Law dramatically improved the legal framework for licensing, and survey data indicate that implementation is progressing at a steady pace. Entrepreneurs still face numerous obstacles in obtaining licenses, however, spending significant time and money on the licensing process. Fortunately, the average validity of a license is now longer, meaning that firms need to go through the process less often. Another remaining issue with licensing in Tajikistan is that the list of licensed activities is still unnecessarily broad. Further licensing reform is needed to eliminate from the list of licensed activities those which present low risk to public health or safety and do not involve the allocation of limited resources. Additional reform to lessen the administrative burdens of the licensing regime may include international best practices such as “silence is consent” and self-certification where appropriate.

3.1 - LEGAL FRAMEWORK: ROOM FOR FURTHER IMPROVEMENT A license is a special permit issued by a state body authorizing a business to carry out a certain activity under specific terms and conditions. When a business is subject to licensing requirements, it must obtain the specific license before starting its activities. Thus licensing happens after business registration, but before a company is allowed to start operations in the activity to be licensed. Tajikistan’s licensing system is regulated by the Licensing Law adopted in May 2004 and “Regulations on peculiarities of licensing of certain types of activities” from April 2007.2

2

Law No.37, “On licensing certain types of activities,” adopted on May 17, 2004 and Resolution No. 172, adopted on April 3, 2007.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing

65


3

Box 3.1 - How does Tajik law define a license? A license is a special permit to carry out a specific activity with obligatory observation of the license terms and conditions, issued by a license authority to a legal entity or an individual entrepreneur.

Legislation regulating the licensing regime is subject to regular improvement. Since it came into force in January 2005, the Licensing Law has been amended six times.3 Table 3.1 summarizes the changes made to the original 2004 law. Note in particular: --

the reduction of number of activities subject to licensing from 115 to 65;

--

the establishment of a validity of not less than five years for licenses for general types of activities; and

--

the introduction of the indicator for calculations4 to determine license fees.

Table 3.1 - Summary of amendments to the 2004 Licensing Law Section

Amended version

Article 6.1

Grants new authority to the licensing body to extend the validity of a license.

Article 7.5

Allows foreign legal and physical entities to obtain licenses on the same terms and procedure as citizens of Tajikistan. The foreign legal entity must have a branch within Tajikistan.

Article 8

Establishes a validity of not less than five years for licenses for general types of activities

Article 13.2

Clarifies that any inspection of a licensee’s activity to verify compliance with the license terms and requirements should be conducted by the body that issued the license in accordance with the 2006 Inspections Law.

Article 16.2

Changes the licensing fee unit from “minimum wage” to “indicator for calculations.”

Article 16.5

Clarifies that when extending the validity of a license, the applicant must pay the amount equal to the issuance cost of a new license. If the license validity is decreased, the amount of license fee goes down proportionally to the change in validity period.

Articles 17 and 18

Reduces number of activities subject to licensing from 115 to 65.

Article 18.2

Clarifies that a license issued in a different country is valid in Tajikistan, if there is a mutual international agreement. Calls for enforcement of international licensing procedures if they are recognized by the Republic of Tajikistan. Allows the possibility of conducting competitive bidding for issuing a license in the area of electricity.

66

3

Law No. 81 on March 1, 2005; Law No. 195 on July 28, 2006; Law No. 277 on June 13, 2007; Law No. 349 on January 5, 2008; Law No. 394 on June 18, 2008; and Law No. 435 on October 6, 2008.

4

The indicator for calculations is an amount fixed annually by the government of Tajikistan in the State Budget Law taking annual inflation into account. This amount is used to calculate taxes, duties and other payments, including licensing fees. Law No. 350, in force from July 1, 2008, introduced the indicator for calculations.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


LICENSING

Even after reform, Tajikistan licenses more activities than others in the region Opportunities exist to further reduce the scope of business operations subject to licensing, by eliminating licensing for low-risk activities and those which do not involve any limited resources. Tajikistan licenses some activities that are not licensed in many other countries, such as tourism and real estate valuation. Chart 3.1 demonstrates that even with recent reforms, the breadth of activities licensed in Tajikistan is still relatively high regionally. Chart 3.1 - Number of economic activities subject to licensing in selected countries5 39

39

Kyrgyz Republic

Bulgaria

64

65

Ukraine

Tajikistan

48

Belarus

In 2006, licensing reform reduced the number of licensed activities by more than 40% (from 115 to 65 activities). However, in some cases, several types of activities were merged into a single, broader activity category without a corresponding reduction in the number of licenses involved. For example, eight of the 65 licensed economic activities relate to transport. Yet the Licensing Law’s implementing regulations divide these eight economic activities into 22 sub-activities, each of which requires a separate license (see table 3.2). Review of the 22 Tajik transport licenses in comparison to other countries indicates that the licensing burden remains unnecessarily high for Tajik entrepreneurs. Kazakhstan, for example groups all transport-related activities into two broad categories for a total of two licenses (one for passenger transport and one for hazardous cargo transport).

5

Sources: IFC 2004 Business Environment Survey in Belarus; Kyrgyzstan Licensing Law #19, adopted May 3, 1997; Ukraine Law #1775-III “On licensing specific types of activities,� adopted on June 1, 2000; http://www.fao.org/world/Regional/REU/resource/more/bulgaria.pdf.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing

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3

Table 3.2 - Transportation licensing in Tajikistan6 6 Eight of 65 licensed activities relate to transport, yet… Engineering research, construction, repair, and reconstruction of highways, railway and road structures

Transportation of passengers and cargo by air

Transportation of passengers and cargo by motorcar

Motorcar and rail maintenance and repair activity

Transportation of passengers and cargo by rail

Terminals for passenger and freight transport

Air traffic maintenance activity

Air transport maintenance and repair activity

There are 22 licenses required. 1

Engineering research, construction, repair, and reconstruction of highways, railway and road structures

2

Regular domestic passengers and cargo air transportation

3

Irregular domestic passengers and cargo air transportation

4

Charter domestic and international passengers’ operations

5

Agent’s activity

6

Board food supply of passengers

7

National (city, suburban, intercity) and international transportation of passengers by motorcar

8

National (city, suburban, intercity) and international cargo transportation by motorcar

9

Traffic development activities of motor transportation

10

Motorcar and rail maintenance and repair activity

11

Main-line rail transportation of passengers

12

Main-line cargo transport

13

Branch railway lines cargo transport

14

Traffic development activities of rail way transportation

15

Bus and railway station activity

16

Motor transport station and route terminal (except city transport terminal) activity

17

Car parking activity

18

National and international cargo terminals activity

19

Aviation-engineering support

20

Aerodrome, electro technical, radio engineering, meteorological, navigating, ornithological, search-and-rescue, maintenance of air traffic, aero navigation, air security of aircrafts

21

Aircraft fuel support

22

Air transport maintenance and repair activity

In fact, at least 200 activities require licensing IFC review of the “Regulation on peculiarities of licensing of several types of activities”7 revealed that in fact there are 208 activities subject to licensing in Tajikistan, not 65. Opportunities exist to reduce still further the activities subject to licensing, by excluding from the list activities which present limited risk to public health and safety.

68

6

Sources: Law No.37, “On licensing certain types of activities,” adopted on May 17, 2004. “Regulations on peculiarities of licensing of certain types of activities” approved by Government Resolution, April 3, 2007.

7

As approved by Government Resolution from April 3, 2007.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


LICENSING

Some of the currently licensed activities which do not generally threaten public safety and health, and could be excluded from the Licensing Law, are cargo transportation, cartography, employment agency, passenger and cargo terminals, car repair, patent attorney, pawn shops, real estate valuation, and tourism. For example, tourism activities that present a risk to public health and safety are already (and more effectively) monitored by sanitary and fire inspections. Licensing is not the only form of control of entrepreneurial activity available to government. Registration, inspection, and certification are other avenues available for regulating activities which are not appropriate for licensing. Some sectors continue to reform licensing procedures. See box 3.2 for an example from Tajikistan’s veterinarians. Box 3.2 - Licensing reform positively impacts Tajikistan’s veterinarians There are approximately 2,000 veterinarians in Tajikistan, either working for the state or in private practice. Veterinarians in government service make a relatively low salary (about 150 somoni or $43 monthly), but vets in private practice can earn from 700 to 1,000 somoni. However, private veterinarians need a license. Until December 2008, a private vet needed one license for veterinary practice that cost up to 900 somoni (about $260) plus a separate license to sell veterinary medicines. Interviews with veterinary associations indicate that perhaps 90% of private veterinarians operated without a license in 2008. The number of licensed private veterinarians is now increasing, thanks to the Law on Veterinary Practices adopted in December 2008. Under the new rules, vets now need only one license, allowing them to both deliver veterinary services and sell veterinary medicines to their clients. This license now costs only 375 somoni (about $108).

The 2004 Licensing Law required all 23 license-granting ministries and agencies to adopt internal legal documents (specifically the statute on the licensing commission, standard applications and forms), bring all other internal documents in accordance with the Licensing Law, and register required documents with the Ministry of Justice. As of January 2009, virtually all legal documents of the license-granting agencies have been registered with the Ministry of Justice.

3.2 - SURVEY FINDINGS: LICENSING IMPOSES GREATER COSTS TO SMEs IN 2007 THAN IN 2005 Despite the comprehensive licensing reform envisioned with the 2004 Licensing Law, SMEs’ experience with licensing has not improved in all areas in 2007 relative to 2005. Licensing is now more expensive, although it takes less time for entrepreneurs to complete the licensing procedure. The licensing law establishes a common licensing procedure for all types of businesses and activities subject to licensing, and the related Government Resolution establishes detailed requirements

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing

69


3

and documents to obtain a license.8 Licensing reform has succeeded at reducing the time required to obtain a license, and at extending the average validity of a license. As the rest of this section shows, however, there are several ways in which licensing has become more burdensome since 2005. A larger share of individual entrepreneurs must go through the licensing process, even though reforms have reduced the number of different economic activities subject to licensing. The licensing procedure is now much more expensive for small and medium companies. In 2007, licensing affected more of the SME sector as a whole, even though fewer small and medium companies and dehkan farms underwent the licensing procedure (see chart 3.2). In 2007, 24% of SMEs applied for a license, compared to 16% and 27% in 2002 and 2005 respectively. The prevalence among individual entrepreneurs of transport and communication, both licensed activities, may account for the recent increase in licensing. Chart 3.2 - Since 2005, licensing coverage has increased for individual entrepreneurs, who form the bulk of the SME sector Percentage of respondents who applied for a license 55 28 17

64 46 27

24 3

Individual entrepreneurs 2002

Small and medium companies 2005

6

16

24

1

Dehkan farms

SME sector average 2007

Individual entrepreneurs in the southern parts of Tajikistan (Kulyab and Kurgan-Tube) are most likely to have applied for a license (see chart 3.3). Regional variation in licensing frequency is especially pronounced among small and medium companies. Only 1 in 3 small and medium companies in Sughd or Kurgan-Tube applied for a license, compared to more than 1 in 2 in Dushanbe or Kulyab, and 3 out of 4 in GBAO (see chart 3.4). The only dehkan farms who report applying for a license are located in Kulyab (3% of respondents) and DRS A (1%).

8

70

Resolution No. 172 “Regulations on peculiarities of licensing of certain types of activities�, adopted on April 3, 2007.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


LICENSING

Chart 3.3 – Individual entrepreneurs in Kurgan-Tube are most likely to apply for an operating license Percentage of individual entrepreneur respondents who applied for a license in 2007

11

DRS A

28

29

31

Dushanbe

Kulyab

Kurgan-Tube

25

18

GBAO

Suhgd

Chart 3.4 – Three out of four small and medium companies in GBAO applied for a license Percentage of small and medium company respondents who applied for a license in 2007 75

33

33

Sughd

KurganTube

58

58

Kulyab

Dushanbe

40

16

DRS B

DRS A

GBAO

Survey respondents were not asked to identify the particular licenses which they hold. They did, however, identify which licensing agencies granted them one or more licenses. The most active licensing bodies for SMEs are the Ministry of Economic Development and Trade, the Ministry of Agriculture and Environmental Protection, and the Ministry of Transport and Communications (see charts 3.5-3.6). Chart 3.5 - Percentage of individual entrepreneurs who received a license from… Among those who received at least one license Ministry of Economic Development and Trade

26.2 19.1

Ministry of Agriculture and Environmental Protection

18.1

Ministry of Transport and Communications 12.9

State Service for Transportation Oversight and Surveillance 6.7

Ministry of Finance 4.0

Main Division for Protection of State Secrets

3.4

Committee on TV and Radio Broadcast Ministry of Energy and Industry

2.3

Ministry of Interior Affairs

2.2

State Surveillance on Utilization and Protection of Nature

1.8

National Bank of Tajikistan

1.8

State Service for Communications Oversight and Regulation

1.8

Ministry of Health

1.6

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Chart 3.6. Percentage of small and medium companies who received a license from‌ Among those who received at least one license Ministry of Transport and Communications

17.9 9.8

Ministry of Energy and Industry

7.5

Ministry of Finance 6.8

Ministry of Health Ministry of Education

4.5 3.8

State Service for Transportation Oversight and Surveillance Fire Department

2.8

Committee on TV and Radio Broadcast

2.0

Time to receive a license has decreased In accordance with the Licensing Law, each licensing authority has up to 30 calendar days to consider a license application and either issue a license or reject the application. Survey results indicate that licensing authorities are generally meeting this requirement, although we observe significant regional variation in processing times. Across the SME sector, the licensing process was shorter in 2007 than in 2005 (see chart 3.7). Within this generally improving performance, regional outliers are observed. Chart 3.7. Average number of days to obtain a license # of calendar days from license application to license issuance/ rejection9 35

2005

29

2007

13

13

8

8

Individual entrepreneurs

Small and medium companies

Dehkan farms

Individual entrepreneurs in Kulyab report waiting 27 calendar days for a decision on their license application, significantly higher than the national average of 8 days. Small and medium companies in 9

72

For small and medium companies: 2007 data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys). 2005 data refer to companies with up to 200 employees.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


LICENSING

Sughd oblast waited 44 calendar days for the average license, which is not compliant with the requirements of the Licensing Law. Reviewing all three SME groups, we find that the licensing process is fairly short in DRS A (see charts 3.8-3.10). Chart 3.8 - Regional variation in the duration of licensing process for individual entrepreneurs # of calendar days from application to license issuance/rejection 27

Average for individual entrepreneurs is 8 business days

8

8

8

4

2 GBAO

DRS A

Kurgan-Tube Dushanbe

Sughd

Kulyab

Chart 3.9 - Regional variation in the duration of licensing process for small and medium companies10 # of calendar days from application to license issuance/rejection 44

Average for small and medium companies is 29 business days 27

21

DRS A

25

Kurgan-Tube

Dushanbe

Sughd

Chart 3.10 - Regional variation in the duration of licensing process for dehkan farms11 # of calendar days from application to license issuance/rejection Average for dehkan farms is 8 business days

8.4 7.6

DRS A

Kulyab

10

Data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

11

There is insufficient data on DRS B, GBAO, Kurgan-Tube, and Sughd for dehkan farms.

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Licensing is now more expensive for small and medium companies The Licensing Law officially defined the cost of a license to be 15 times the minimum monthly wage.12 In January 2008, the government changed the basis for calculations of licensing and other costs from the minimum monthly wage to the “calculation index.”13 Decoupling the fees for licenses and other procedures from the minimum wage is a positive reform, since now increases in the minimum wage will raise workers’ salaries without also adding to the regulatory burden for employers. Fortunately for entrepreneurs, the indicator for calculations is currently less than the minimum monthly wage, making the cost of each license cheaper. As of July 1, 200814 the minimum monthly wage equals 60 somoni (or $17), and as a result the cost of license as originally calculated would be 900 somoni (or $260). Using the indicator for calculations, which is 25 somoni (or $7) effective July 2008, the cost of a license is now 375 somoni (or $108) (see figure 3.1). Figure 3.1 - Changes in the cost of a license, from 2006 to 2009 20 TJS X 15 = 300 TJS April 1, 2006

Minimum monthly wage =20 TJS

25 TJS X 15 = 375 TJS July 1, 2008

Indicator for calculation =25 TJS

35 TJS X 15 = 525 TJS July 1, 2009

Indicator for calculation =35 TJS

Survey results indicate that for small and medium companies, the cost of a license in practice varies from the cost of a license as defined by law. The average small and medium company who underwent the licensing process spent 1,281 somoni (or $370) and received an average of 1.4 licenses. This works out to a cost of about 944 somoni (or $272) per license, well above the legally defined cost of 300 somoni (or $87) throughout 2007. Survey data indicate that the cost for the average individual entrepreneur who underwent licensing increased from 289 somoni in 2005 to 360 somoni in 2007, which is roughly in line with inflation over

74

12

In very few cases, such as banking, the cost of a license differs from this standard cost.

13

Law of the RT “On indicator for calculations” #350, from January 5, 2008.

14

Decree of the President of the RT “On measures to enhance community’s social protection, increase wages for employees of budgetary institutions, organizations, as well as the amount of pensions and stipends” #480, from June 20, 2008. The indicator for calculations is an amount fixed annually by the government of Tajikistan in the State Budget Law taking annual inflation into account. This amount is used to calculate taxes, duties and other payments, including licensing fees. Law No. 350, in force from July 1, 2008, introduced the indicator for calculations.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


LICENSING

this period. For small and medium companies, however, the cost grew substantially (see chart 3.11). Chart 3.11 - In 2007 the cost of all licenses has increased for small and medium companies and individual entrepreneurs15 Cost in somoni (including official and unofficial payments), for those who obtained at least one license 1,281 2002 2005 2007

717

597 288

289

360

322 82

Individual entrepreneurs

Small and medium companies

Dehkan farmers

Licensing is significantly more expensive for businesses in Dushanbe than in the rest of Tajikistan. Individual entrepreneurs in Dushanbe who obtained licenses report spending an average of 800 somoni (about $230) on all licenses, compared to just 201 somoni (about $58) in Sughd. Among small and medium companies, those in Dushanbe spend more on licensing than others in nominal terms but not as a percentage of turnover (see chart 3.12). Chart 3.12 - Small and medium companies who underwent licensing in 2007 spent 0.5 to 0.7% of turnover on all licenses Cost of all licenses obtained (including official and unofficial payments) among small and medium companies who obtained at least one license, in somoni and as % of average annual turnover16 1,635 1,133

1,084 0.5

Dushanbe Cost of procedure, TJS

0.5

Sughd

0.6

Kurgan-Tube

1,159 0.7

DRS A

Cost of procedure as % of turnover

15

An insufficient number of dehkan farmers answered the question about the cost of getting a license in 2007. For small and medium companies: 2007 data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys). 2002 and 2005 data refer to companies with up to 200 employees.

16

Data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

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3

In 2007 existing small and medium companies spent more than twice as much as start-ups on licensing (see chart 3.13). Existing SMEs are more invested in the business, and their owners rarely walk away when the licensing burden becomes high. Instead, they may be willing to pay higher prices or engage in unofficial solutions, while a start-up might simply decide not to start the business (or become informal) once they encounter difficulties with licensing authorities. Chart 3.13 - Average cost of obtaining all licenses by existing small and medium companies is 1,470 somoni17 Cost in somoni (including official and unofficial payments), for those who obtained at least one license 1,470 600

Start - ups

Existing businesses

The cost of licensing for small and medium companies working in tourism is especially high (see chart 3.14), even though development of the tourism industry is a priority direction of government policy.18 As shown earlier (chart 3.6), the most common issuers of licenses to small and medium companies are the Ministry of Transport and Communication, the Ministry of Energy and Industry, and the Ministry of Health. Chart 3.14 - Average cost of all licenses for small and medium companies, by industry (in somoni)19 Among those small and medium companies who did receive a license

76

Tourism and hotels

1,166

Construction

938

Consumer good production

923

Other

704

Retail trade

Transport

577

Wholesale trade

2,223 1,626

17

Data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

18

State Program of Tourism Development in the RT for 2004-2009, approved by Government Resolution on December 23, 2003. Conception of Tourism Development in the RT for 2009-2019, approved by Government Resolution on April 2, 2009.

19

Data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

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LICENSING

Improvement in validity period of issued licensing When the validity period of a license is short, entrepreneurs suffer from more uncertainty about the future of their business. To keep operating, they must go through the licensing procedure frequently, spending time and money to do so. The original 2004 Licensing Law specified that any license should be no less than 5 years for all businesses and activities. Since then, many legal changes have adjusted the validity period of a license. In 2006, amendments to the Licensing Law identified a sub-set of activities whose licenses can be valid for less than the standard 5 years: --

no less than 3 years for specific types of activity (banking activity, dealing with foreign currency, electricity, atomic activity, and others), and

--

no less than 5 years for all other types of activity

In accordance with other amendments to the Licensing Law, the validity of a license for individual entrepreneurs operating without hiring employees may be from 1 to 5 years, regardless of their activity, at the entrepreneurs’ choice.20 The average validity of a license for small and medium companies is 44 months (see chart 3.15). This is more than a three-fold improvement from 2005. Most SMC activities are general, thus they should receive 5 year licenses unless the entrepreneur requests otherwise. Chart 3.15 - Validity of the average license, in months 2005

44

2007

24 11

Individual entrepreneurs

13

Small and medium companies

8

12

Dehkan farms

For individual entrepreneurs and dehkan farms the average validity of a license is 24 and 12 months respectively. This indicator is consistent with the Licensing Law, given that individual entrepreneurs operating without hired employees can apply for a license valid from 1 to 5 years.

20

Law of the RT “On introducing amendments into the Law of the RT ‘On licensing certain types of activities in the RT’” from July 2006, #195.

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The average validity of a license for existing companies is 39 months, while the average validity for start-up companies (who registered in 2006 or 2007) is 47 months (see chart 3.16). The Licensing Law does not specify different validity periods for a license for new or currently operating businesses. Chart 3.16 - Average validity of a license for small and medium companies, in months 47

39

Start - ups

Existing businesses

Regional comparison of license validity shows that Dushanbe licensing authorities demonstrate the most compliance with this aspect of the Licensing Law (see charts 3.17 - 3.18). Chart 3.17 - Average validity of a license for small and medium companies, in months 21 52 32

Sughd

36

37

39

Kurgan-Tube

DRS A

GBAO

42

Kulyab

Dushanbe

Chart 3.18 - Average validity of a license for individual entrepreneurs, in months 22 30 15

18

21

23

Kurgan-Tube

Sughd

9

GBAO

78

DRS A

Kulyab

21

DRS-B was excluded due to insufficient number of observations.

22

DRS-B was excluded due to insufficient number of observations.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing

Dushanbe


LICENSING

3.3 - RECOMMENDED POLICY OPTIONS: SILENCE IS CONSENT AND SELF-CERTIFICATION Although fewer entrepreneurs need to obtain licenses than before, licensing remains an expensive and time-consuming procedure. The new regime has reduced the number of activities subject to licensing, but the procedure of obtaining licenses remains problematic for the SME sector. One of the easiest ways to reduce the licensing burden would be to eliminate the unnecessary licenses that have so far escaped reform. International best practices provide an opportunity to make fundamental improvements in the licensing procedure in Tajikistan. Bulgaria, Italy, Moldova, Romania, Spain and Ukraine have successfully introduced the “silence is consent” and “self-certification” principles for licensing and other regulatory procedures. Silence is consent is a mechanism where government officials are required to respond to the application of an entity within an allotted time frame. If there is no response within the specified time, the entity may undertake the requested action without additional delay (tacit authorization). The “silence is consent” principle should not extend to all administrative procedures. This approach is most appropriate for administrative procedures where safety is not critical, such as pawnshops’ activity. Several governments, including formerly communist countries, have adopted this mechanism (see box). Box 3.3 - How selected countries have introduced the “silence is consent” principle --

In Bulgaria, the 2002 Law on Reduction of Administrative Regulation and Administrative Control of Economic Activity established such a rule.

--

Romania’s 2003 legislation on the Tacit Silent Approval Procedure introduced “silence is consent” for issuing 480 licenses.

--

Moldova’s 1999 Law on Licensing grants tacit authorization for applications which have not been denied within a set number of days.

--

In Bosnia and Herzegovina, several municipalities have applied the rule on a pilot basis for selected processes, such as sole proprietorship registration and the issuance of certain licenses.

--

Spain’s 1992 Administrative Procedure Law places an obligation on administrative bodies to respond to applications within at most six months, unless the relevant law specifies an earlier deadline.

Self-certification is a method whereby the applicant attests or claims that it is in conformity with certain requirements or norms. Under the assumption that the claim is true, the applicant can undertake the procedure requested, with the understanding that the government can (and probably will) review the validity of the applicant’s statements. This principle works in situations where self-certifications carry a high degree of liability for false statements and effective enforcement mechanisms are in place. The government expresses a certain level of trust in the enterprise and performs checks afterwards to verify the information.

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RECOMMENDATIONS 1. Look for opportunities to further reduce the number of activities subject to licensing by excluding activities that present limited risk to public safety and health, such as tourism, real estate valuation, cargo transportation, and patent attorneys’ activities. 2. Increase transparency in the licensing issuance procedure, by publishing licensing requirements and calculation of licensing fees. This will reduce the barriers to market entry, resulting in the establishment of new businesses and jobs. Increased transparency will also narrow the scope for corruption by licensing authorities. 3. Simplify the licensing process by introducing, where appropriate, the “silence is consent” and “self-certification” principles via legal amendments. Full benefits from these reforms will require clear recourse/appeals procedures and an enhanced commercial court system. 4. Amend the 2004 Law on Licensing to list the specific reasons for which license applications may be rejected or licenses revoked. 5. Review the renewal processes at permit-issuing agencies, and develop simplified procedures for those who already hold a particular license. 6. Extend license validity to an unlimited period, unless periodic review of the license holder’s qualifications is necessary. 7. Develop criteria, procedures, and requirements for permit-issuing bodies who want to introduce new licenses, and describe this approach in the law. Currently, new licenses can be introduced only through amendment to the 2004 Licensing Law.

80

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LICENSING

Attachment 3.1- List of license-granting agencies Name of license-granting agency 1

State Agency on Land Management, Geodesy and Mapping

2

State Agency on Drug Control

3

State Agency on Construction and Architecture

4

Academy of Science

5

State Division on Protection of State Secrets

6

State Division on Surveillance of Safety Works in Industry and Mining (SDSSW)

7

State Division on Geology

8

State Committee on Investment and State Property Management

9

State service on control in the area of transport

10

State service on control in the area of communication and informatization

11

State Committee on Youth, Sport and Tourism

12

Conservancy Committee

13

State Committee on Television and Radio

14

Ministry of Internal Affairs

15

Ministry of Health

16

Ministry of Education

17

Ministry of Agriculture

18

Ministry of Finance

19

Ministry of Economic Development and Trade

20

Ministry of Energy and Industry

21

Ministry of Justice

22

National Bank

23

Veterinary Control Service

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3

Attachment 3.2 - Activities subject to licensing Extracts from the Law “On Licensing Specific Activities” Article 17. The list of activities subject to licensing According to the present Law the following activities are subject to licensing: •

issuing certificates to the keys to electronic digital signatures, registration of owners of electronic digital signatures, providing services dealing with use of electronic digital signatures and proving authenticity of electronic digital signatures;

revealing electronic devices used for secret gathering of information in premises and industrial facilities (except for the cases when the above activity is carried out to address the own needs of the legal entity or the individual entrepreneur);

development and manufacturing of information protection and confidentiality equipment;

technical protection of confidential information;

development and manufacturing of special technical equipment used to obtain private information; sale of the latter or its purchase for the purpose of selling it when these activities are carried out by entrepreneurs and legal entities engaged into business activity;

manufacturing protected form copying printing articles, including forms for securities, and trading these goods;

trading civil and military weapons, their basic spare parts and ammunition;

repair and maintenance of cargo lifting devices (except when the activity is carried out to address the needs of the legal entity or the individual entrepreneur);

work with explosive, inflammable, and chemically hazardous industrial facilities;

extracting, processing, exploration of oil, gas, coal, and operation of oil and gas network facilities;

storing and trading oil, gas and the goods from their processing (except when this activity is carried out to address the needs of the legal entity or the individual entrepreneur);

installation, commissioning and repair of power facilities and equipment (except when this activity is carried out to address the needs of the legal entity or the individual entrepreneur);

expertise of industrial safety;

manufacturing, storage, distribution, transport and use of industrial explosives;

manufacturing and sale of pyrotechnic articles, included into the State register of explosives;

installation, repair and maintenance of fire safety equipment for buildings and constructions;

manufacturing, transmitting and distribution of electric power (except when this activity is carried out to address the needs of the legal entity or the individual entrepreneur);

design and feasibility studying, construction of buildings and edifices, including expansion, reconstruction, repair and restoration of the existing facilities;

design and feasibility studying, building, repair and reconstruction of motorways, railways and road structures;

survey activity;

82

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


LICENSING

geodesy and map-making;

hydrometeorology and related activities, including active influence on hydrometeorological and geophysical processes and phenomena;

pharmacy (manufacturing medical and cosmetic goods, manufacturing of medical goods and equipment, sale of medicines and medical goods, manufacturing and sale of therapeutic and preventive food supplements);

private medical practice;

maintenance service of medical equipment (except when this activity is carried out to address the needs of the legal entity or the individual entrepreneur);

the activity dealing with use of infectious agents;

manufacturing of disinfectant and deratization substances;

breeding narcotic plants for scientific purposes and for designing new narcotic drugs and psychotropic substances;

legal trade of narcotics, psychotropic substances and precursors (development, manufacturing, processing, transporting, sending, supply, sale, distribution, purchase, use, importing and exporting);

the activity dealing with sources of ionization radiation (generators);

the activity dealing with import and export, manufacturing, trade, use, transportation, storing, processing and destruction of radioactive substances (Law no. 519 dd. 19.05.09);

transporting passengers and cargo by air;

transporting passengers and cargo by motor vehicles (except when this activity is carried out to address the needs of the legal entity or the individual entrepreneur) (Law no.349 dd. 5.01.08);

transporting passengers and cargo by train (except when this activity is carried out to address the needs of the legal entity or the individual entrepreneur and without access to the common public railways);

technical maintenance and repair of motor vehicles and railway transport;

the work of passengers and cargo terminals;

technical services for air traffic;

technical maintenance and repair of air transport;

collection, use, neutralization, transport and storage of hazardous waste;

organizing and operating of cashier offices of gambling machines, gambling houses and lotto games (Law no. 485 dd. 26.03.09);

evaluation and assessment activity;

the activity dealing with tourism;

collecting, processing and sale of ferrous/non-ferrous scrap and waste;

the activity related to employment of Tajikistan nationals outside of Tajikistan and the activity related to employment of foreign nationals on the territory of Tajikistan;

audit activity;

operating pawn-shops;

work at the stock exchange;

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3

insurance;

work of professional participants of the securities market;

manufacturing, importing and exporting of tobacco goods;

private veterinary;

attorneys;

the activity in the field of education (except for the State nursery institutions and institutions of general education - primary, secondary complete and secondary basic);

the activity related to trade of precious metals and precious stones (processing of precious metals scrap and waste into end-products, refining of precious metals, salvage of precious stones, buying from the community jewelries and other things made of precious metals and stones as well as parts of such things and articles, whole and retail sale of precious metals and precious stones);

patent attorney;

the activity in the field of television, radio broadcasting and audiovisual presenting;

buying, sale, use, disposal and destruction of the substances destroying the ozone layer, and the goods containing such, as well as all the activities related to installation, maintenance and repair of the equipment where the ozone layer destroying substances are used;

collecting medical herbs and harvesting raw materials for medicines;

operation of non-government pension funds. ( Law no.195 dd. 28.07.06)

Article 18. Special list of the activities carrying out of which requires a license According to the present Law the following activities are subject to special licensing procedure: •

carrying out banking transactions;

carrying out transactions with foreign currency;

manufacturing and selling of ethyl alcohol, goods containing alcohol and spirits;

electrical communication;

use of the Earth’s interior;

use of articles of flora and fauna enrolled into the Red Book of Tajikistan;

the activity, works and services in the field of use of nuclear power.

84

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Licensing


Chapter 4 - PERMITS


4

Chapter 4 - PERMITS Key Survey Findings --

The direct cost of permit procedures to the overall SME sector was $4.0 million in 2007.

--

In 2007 37% of SMEs obtained permits, whereas 58% of SMEs went through the permit process in 2005. Local authorities (khukumat) are the most common permit-issuing authorities.

--

Among those who received permits, the average SME in 2007 received 3.3 permits, compared to 1.5 in 2005.

--

Small and medium companies spent 1588 somoni (about $458) on average to obtain all permits in 2007, four times what they spent in 2005.

--

Dehkan farms who received permits spent 225 somoni ($65) on all permits, more than five times what they spent in 2005.

--

The cost to individual entrepreneurs for all permits rose more moderately, to 122 somoni (about $35).

--

In 2005, the total cost of one permit (including any unofficial payments) was 87 somoni (about $25) for a small and medium company. Just two years later, those companies spent an average of 934 somoni (about $270) for one permit.

--

The time needed to obtain a permit has significantly increased for dehkan farms (from 4 days in 2005 to 13 days in 2007).

--

The time required to obtain a permit decreased for individual entrepreneurs (from 3 days in 2005 to 2 days in 2007) and small and medium companies (from 8 days in 2005 to 7 days in 2007).

Licensing and permits are treated separately in this survey report, because Tajikistan has a unified legal framework regulating licenses but not permits. Thus, while there are clear rules for which activities require a license, there is no such certainty regarding permits. Permits can include governments providing business with permission (often in the form of a certificate or document) to enter a market and/or undertake a specified activity. Permits can also relate to the use of identified equipment or premises, or approval for particular one-off activities (such as commencing the construction of a building).1 From a regulatory reform perspective, it makes little sense to differentiate between licenses and permits. The differences between the two are rhetorical. Indeed, there have been cases of reforms involving the elimination of permits, with the prior approval requirements of these permits resurfacing again shortly after as “licenses”. The key risks and costs of licensing described in the introduction to Chapter 3 also apply to permits. Because there is no unified legal framework regulating the permit regime in Tajikistan, permits and other types of approval documents are regulated by dozens of laws and regulations (see Attachment 4.1). The lack of a unified legal framework and the lack of consistent rules regulating permit issuance create a favorable 1

86

“Policy Framework Paper on Business Licensing Reform and Simplification.” The World Bank Group’s Investment Climate Advisory Service. 2009.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits


PERMITS

ground for individual government agencies to set up their own rules and change them at will. The resultant complexity and lack of transparency in the permit process creates space for corruption among state agencies dealing with permits. Legislation does not establish clear rules for charging payments for issuance of permits, or for the steps involved in the permit issuance process. Even though there are very few cases of permit fees being established in law, businesses are routinely asked to pay fees during the permit process. In international best practice, permits are required only for activities which present important risks to public health or safety. In Tajikistan, there is significant scope to reduce the number and breadth of activities subject to permits. For example, 80% of individual entrepreneurs in the communications sector received a permit in 2007. Many of these entrepreneurs are engaged in low-risk activities, like operating telephone kiosks or selling prepaid mobile phone cards. Comprehensive permits reform should address not only the legal framework for permits, but also the practical justifications for permit requirements. Survey results indicate that the share of SMEs who obtain permits is falling, even though virtually all firms are required to have at least one permit. In 2007 37% of SMEs obtained permits, whereas 58% of SMEs went through the permit process in 2005. The cost of obtaining all necessary permits significantly increased from 2005 to 2007. Small and medium companies spent 1588 somoni (about $458) on average to obtain all permits in 2007,2 four times what they spent in 2005. The time needed to obtain a permit has significantly decreased for individual entrepreneurs (from 8 in 2005 to 3 days in 2007) and small and medium companies (from 34 days in 2005 to 14 days in 2007), even though it has increased for dehkan farms (from 4 days in 2005 to 13 days in 2007).

What is a permit? A permit is authorization issued by a state agency or a local governance body allowing an entrepreneur or a company to pursue certain actions or activities, Permits can take different forms, including a permit per se, an inscription, a stamp of approval, a report, an assessment, an evaluation, an expert report, a decision, etc. By permits system, we mean all forms of state authorization, except for registration, licensing and certification.

Reforming the system of business permits will allow Tajikistan to build a clearer and more open regulatory framework that will improve the environment for business. Reform can reduce transaction costs, decrease uncertainty, and encourage healthy competition in the Tajik marketplace.

4.1 - LEGAL FRAMEWORK: VAGUE AND CONFUSING From the date of state registration of the business, in order to start an activity, virtually all businesses are required to obtain several 2

Data refers to firms with between 5 and 200 employees (Source: Enterprise Surveys).

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4

permits from a variety of state authorities (to use a particular kind of equipment or to operate a particular type of business). Tajik legislation does not provide a definition of a permit. For the purposes of this Survey, the term “permit� was used to refer to any type of permissive document approval, conclusion, decision, or authorization that gives the applicant a right to undertake a specific action (see box). The number of permits required to open and run a business remains very high in Tajikistan. Some permits are required for many entrepreneurs to begin operations, such as permits from fire authorities or sanitary and epidemiological authorities. Other types of permits are more specific to specialized sectors, such as permission from the Traffic Police for cargo or passenger transportation. Analysis of regulations governing permits in Tajikistan reveals a fragmented, inefficient system that requires an overhaul. IFC analysis identified more than 500 separate permits, approvals and other documents of permissive nature in Tajikistan. More than 40 state authorities are empowered to issue permits (see attachment 4.2). IFC analysis reveals that numerous permits inherited from the Soviet Union are not consistent with the requirements of a market-led economy (see box).

Box 4.1 - Examples of unnecessary permits in Tajikistan --

Permit to design and copy financial (accounting) forms granted by the Ministry of Finance (Law on Accounting, Article 14);

--

Permit to place advertisements on mail going through the post issued by the Ministry of Transport and Communication (Law on Advertisement, Article 15);

--

Permit to use medical equipment issued by the Center for State Control over Pharmaceutical and Medical Activity (Internal instruction of the agency, dated June 11, 2007, #15.) All medical equipment should already be certified;

--

Permit to use electro heating and electro-thermal equipment to be obtained from the Ministry of Energy and Industry (Government Resolution #605, dated December 28, 2006); and

--

Approval for adopting the norms of using raw materials, energy resources per unit of manufactured goods issued by the Ministry of Energy and Industry (Government Resolution #605, dated December 28, 2006).

Additionally, contradictory to the principles of state control there are some cases when permits or approvals are granted by privately owned companies. An example is a permit for manual extraction of mineral resources issued by mining companies.3

Confusing permit procedures The lack of a systematic and unified approach to regulate permits leads to difficult procedural steps for obtaining a permit. For almost 3

88

See Article 16 from the Law on Interior.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits


PERMITS

all permits, there is no officially required list of documents required, or any time limits on the officials who review applications. As a result, permit issuing agencies are able to establish their own rules, and they are not required to publish information about those procedures. A considerable portion of permit-issuing procedures are not made public, but are instead stipulated in the regulations of government agencies, local authorities, and local governments to which access is very limited. As a result, the permit issuing process remains very complex and inaccessible to entrepreneurs without personal connections. Construction projects require many layers of approval, to prevent shoddy buildings that could be potentially dangerous. IFC analysis identified 13 steps required to begin construction of a small-scale shop, requiring at least 18 months in total (see figure 4.1). Figure 4.1 – Steps required to construct a small shop in Tajikistan Step 1. State agency on licensing of construction and architecture activity. Goal: Getting of License Duration: 1 month Payment: 14 IC1 (350 TJS) 1 Indicator for calculations

Step 2. Khukumat Goal: Getting of Decision for design with certificate of plot selection Duration: 3-6 months Payment: not stipulated

Step 3. Design organization Goal: Coordination of design and breakdown document of Duration: from 2 to 3 months Payment: as per contract

Step 4. Scientific institute. Goal: Engineering geological, hydrologi, geodetic research Duration: not fixed Payment: as per contract

Step 8. Sanitary and Epidemiological Service. Goal: Coordination of design and break document Duration: 30 days Payment: in accordance with SES rates

Step 7. Water supply Goal: Coordination of design and breakdown document Duration: 30 days Payment: not stipulated

Step 6. Telephone station Goal: Getting of technical conditions Duration: 10-15 days Payment: based on price list

Step 5. Energy supply Goal: Getting of technical conditions Duration: 14-20 days Payment: based on price list

Step 9. Fire safety Goal: Coordination of design and break document Duration: 10-15 days Payment: not stipulated

Step 10. Energy supply Goal: Coordination of design and breakdown document Duration: 15-20 days Payment: not stipulated

Step 11. Energosbyt Goal: Conclusion of agreement for energy consumption Duration: 2-5 days Payment: not stipulated

Step 12. State ecologocal expertise Goal: Getting of SEEA conclusion Duration: 45 days Payment: in accord with SEEA rates

Step 15. Fire safety Goal: Coordination of design and break document Duration: 10-15 days Payment: not stipulated

Step 14. Energy supply Goal: Coordination of design and break document Duration: 15-20 days Payment: not stipulated

Step 13. Independent expertise agency of construction facilities Goal: Getting of expertise conclusion Duration: 30-45 days Payment: in accordance with price list

Even this picture oversimplifies the underlying requirements. Getting a decision for design with certificate of land plot selection from the local authorities (Khukumat), identified as step 2 in chart 11, requires an additional 13 steps (see figure 4.2).

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Figure 4.2 – Steps required to obtain a decision from the Khukumat on design with certificate of land plot selection Procedures for preliminary coordination (compliance) for construction facility location Land Settlement Committee

Legal Entity Request

The purpose of plot needed

The case on land settlement will be arranged & submitted to commission

Chairman of district/city Certificate on plot selektion Regular Commission, consist of:

To be submitted to local govemments

Deputy Chairman Land Settlement Committee Sanitary and Epidemiological Service Fire Ministry of agriculture & environmental protection Water using body

Issue conclusion

To be considered in 15 days

Map extract from land using plan

Decision on facility design at the selected plot

Electricity body Permission for designing

No official prices for permits The cost of specific services is determined on a case-by-case basis by the permit-issuing agencies themselves. The Law “On other obligatory payments” envisions 20 types of obligatory payments for administrative procedures which give the right to the applicant for a specific action or activity (i.e. permit).4 These payments include among others: licensing fees, fees for registration of medicines, for environmental pollution, for actions of state automobile inspection, for actions of state control over agricultural machinery and equipment, for advertising services etc. The existence of this Law implies that permit-like documents not envisioned in the Law should be issued at no cost. However, neither this nor other legal documents regulate fees associated with the abovementioned permits. Consequently, an applicant is unable to determine the total official cost with respect to obtaining permits.

International comparison The difficulty of Tajikistan’s permits system is confirmed by the World Bank Group’s Doing Business 2009 report, which ranks Tajikistan 179 among 181 countries on the “Dealing with Construction Permits” indicator. Tajikistan performs more poorly than most of its neighbors on this indicator, and according to the report it takes nearly a year to obtain all necessary permits to construct a simple warehouse (see chart 4.1).

4

90

No. 197 from July 28, 2006.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits


PERMITS

5

Chart 4.1 – In Tajikistan, businesses spent 351 days to obtain a construction permit in 20085 471 210

Azerbaijan

Belarus

Kazakhstan

159

113

Georgia

207

231

Kyrgyz Republic

260

Uzbekistan

351

Tajikistan

Ukraine

4.2 - SURVEY FINDINGS: FEWER SMEs RECEIVE PERMITS, BUT THEY PAY MORE FOR THEM Fewer SMEs went through the permits procedure in 2007 than in 2005 – a drop from 58% to 37 % of SMEs (see chart 4.2). This decline is particularly noticeable among dehkan farms, although the trend is consistent across the SME sector. Because licenses and permits can be thought of as interchangeable policy instruments to achieve the same regulatory goals, it is possible that this reduction is related to implementation of the 2004 Licensing Law. The licensing reform reduced the scope of economic activities subject to licensing, and communications announcing this change may have convinced some SMEs that they do not need to apply for permits (or licenses). Chart 4.2 - 58% of small and medium companies underwent the permits procedure in 2007 % respondents 2005 2007

76 58

57 44

58

50

37 7

Individual entrepreneurs

Small and medium companies

Dehkan farms

SME sector average

Among those who did receive permits, SMEs in 2007 received almost two more permits than in 2005 (see chart 4.3). The growth in average number of permits in the SME sector is driven by individual entrepreneurs and dehkan farms, who each obtained an average of one more permit in 2007 than in 2005. Thus, while the percentage of SMEs who obtain permits is falling, the number of permits obtained by those who do receive permits is now increasing. 5

Source: Doing Business 2009

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Chart 4.3 - On average SMEs obtained 3 permits in 2007 Average # of permits, among those who received permits 2005 2007

1.5

3.4 3.9

2.6

Individual entrepreneurs

1.3 Small and medium companies

2.6

1.5

Dehkan farms

3.3

SME sector average

Local authorities are the most active permit-issuing bodies Survey respondents were not asked to identify the particular permits which they hold. They did, however, identify which permitting bodies granted them one or more permits. The most active permitissuing bodies for SMEs are the local authorities (khukumat). Anyone wishing to begin economic activity on their land, such as opening a small shop, must obtain a permit from the local authorities. The local authorities also issue permits for alcohol sales, design of construction projects, and land allocation. The Sanitary and Epidemiological Service, Fire Authority, and Energy Surveillance also frequently issue permits to individual entrepreneurs and small and medium companies (see charts 4.4 – 4.6). Chart 4.4 - Percentage of individual entrepreneurs who received a permit from‌ Among those who received at least one permit Local authorities (khukumat) Sanitary& Epidemiological Service Fire Authority Energy Surveillance Energy Distribution Labor and Social Protection Water Authority Other State Service for Pharmaceutical Oversight 0

92

10

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits

20

30

40

50

60

70

80


PERMITS

Chart 4.5 - Percentage of small and medium companies who received a permit from‌ Among those who received at least one permit Fire Authority Local authorities (khukumat) Energy Surveillance Sanitary & Epidemiological Service Labor and Social Protection Energy Distribution Water Authority State Service for Pharmaceutical Oversight Other 0

10

20

30

40

50

60

70

80

Chart 4.6 - Percentage of dehkan farms who received a permit from‌ Among those who received at least one permit Local authorities (khukumat) Water Authority Labor and Social Protection Fire Authority Sanitary & Epidemiological Service Energy Surveillance Other Energy Distribution 0

10

20

30

40

50

60

70

80

Permit coverage varies by industry There is significant variation in the prevalence of permits among different sectors (see chart 4.7). More than 80% of SMEs involved in tourism or pharmaceuticals received at least one permit in 2007. Only 42% of agriprocessors received a permit in 2007.

85

88

Pharmaceutics

Tourism and hotel

73

Medical services

62

Catering

Construction

62

Production of consumer goods

51

Consumer services

49 50

Transport

Wholesale trade

47

Retail trade

42

43

Communication

35

Agri Processing

Agriculture

7

43

Consulting services

Chart 4.7 - SMEs engaged in tourism are most likely to have a permit % of respondents in the given sector who received a permit in 2007

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Individual entrepreneurs engaged in trade were less likely to receive a permit than those in catering or communications (chart 4.8). Small and medium companies engaged in the pharmaceutical industry, tourism, retail trade and medical services were the most likely to have at least one permit in 2007 (see chart 4.9). In some cases, the same sector shows different coverage of permits among the different types of SMEs. For example, 80% of individual entrepreneurs in the communications sector received a permit in 2007, yet just 17% of small and medium companies in that sector received one. A permit from the Ministry of Transport and Communications is required for operators of telephone kiosks, internet-cafĂŠs, and vendors of prepaid mobile phone cards.

Communication

Consumer services

Catering

48

80

62

53

Production of consumer goods

42

Transport

Wholesale trade

26

50

Retail trade

Chart 4.8 - Individual entrepreneurs in the communications sector are most likely to obtain a permit % of respondents in the given sector who received a permit in 2007

Consumer services

Construction

Wholesale trade

90

Pharmaceutics

Transport

88

Tourism and hotel

51

74

Retail trade

50

73

Medical services

49

63

Production of consumer goods

42

62

Catering

36

Agri Processing

Communication

17

53

Consulting services

Chart 4.9 - Small and medium companies engaged in pharmaceutical industry and tourism are most likely to have a permit % of respondents in the given sector who received a permit in 2007

Prevalence of permits varies by region The absence of unified legislation on permits means that permit procedures are vaguely defined. As a result, sometimes officials from the same agency, but operating in different regional offices, will require different documents from businesses or follow different processes when issuing permits. In some cases this may reflect different interpretations of a national-level regulation, and in others it

94

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PERMITS

may reflect the absence of any regulation at all on the particular permit. Only 35% of individual entrepreneurs in Dushanbe received a permit, compared to 59% in Sughd oblast (chart 4.10). Yet small and medium companies in Dushanbe are much more likely to have a permit than their counterparts in Sughd (chart 4.11). Businesses in Kulyab were the least likely to have a permit in 2007, whether individual entrepreneurs, small and medium companies or dehkan farms (charts 4.10 - 4.12). Chart 4.10 - In Kulyab only 14% of individual entrepreneurs received a permit in 2007, while in Sughd 59% did % of respondents in each region who received a permit in 2007

14

22

Kulyab

GBAO

32

35

DRS A

Dushanbe

58

59

KurganTube

Sughd

Chart 4.11 - Small and medium companies in DRS A were most likely to receive a permit % of respondents in each region who received a permit in 2007

33 Kulyab

43

Sughd

53

55

GBAO

KurganTube

67

76

Dushanbe

DRS A

The two sub-regions of southern Tajikistan, Kulyab and Kurgan-Tube, are at opposite ends of the spectrum for dehkan farms, in terms of the prevalence of permits (see chart 4.12). In Kurgan-Tube, 15% of dehkan farms needed to obtain permits, while in Kulyab only 1% did – even though both are located in the same oblast (Khatlon). Chart 4.12 - Only 1% of dehkan farms received a permit in Kulyab % of respondents in each region who received a permit in 2007 15

1 Kulyab

3

GBAO

6

DRS A

8

Sughd

Kurgan-Tube

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Duration of permit procedures The time required to go through the permits procedure has increased in 2007 compared to 2005. It now takes dehkan farms and small and medium companies 7 working days to receive one permit (see chart 4.13). The time required for individual entrepreneurs to obtain a permit has dropped to 2 days. Chart 4.13 - Days needed to obtain a permit increased for dehkan farms in 2007 #6 of working days (including waiting time) to receive one permit, among those who underwent the procedure6 2005

8 3

7

4

2

Individual entrepreneurs

2007

Small and medium companies

7

Dehkan farms

Considering the average number of permits obtained by an SME and the average time required to obtain one permit, it is possible to calculate the total time spent by the average SME on the entire permit process. Among those who receive permits, the average individual entrepreneur spent a total of 6 working days on the permit procedure, the average small and medium company 28 working days, and the average dehkan farm 21 working days. In other words, the average small and medium company devoted more than a month of staff time to the permit process in 2007. Permit processing times by region are largely consistent for individual entrepreneurs. There is more regional variation for small and medium companies and dehkan farms. Regional comparison of duration of the permit procedure for small and medium enterprises shows that permit procedure in Kurgan-Tube is longer than in other regions (see charts 4.14-4.16). Chart 4.14 - Permit processing times for individual entrepreneurs are largely consistent by region # of working days (including waiting time) to receive one permit, among those who underwent the procedure

6

96

1.1

1.3

1.7

GBAO

Sughd

Kulyab

1.9

1.9

Dushanbe Kurgan-Tube

2.0 DRS A

For small and medium companies, 2007 data show companies with 5 to 200 employees (Source: Enterprise Surveys), and 2005 data show companies with up to 200 employees (Source: IFC SME Survey).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits


PERMITS

Chart 4.15 - Small and medium companies spent 11 days to obtain a permit in Kurgan-Tube, but only 3 in DRS A # of working days (including waiting time) to receive one permit, among those who underwent the procedure7

7

2 DRS A

9

9

Sughd

Dushanbe

11

Kurgan-Tube

Chart 4.16 - Dehkan farms spent 8 days to obtain a permit in DRS A # of working days (including waiting time) to receive one permit, among those who underwent the procedure 7

8

Sughd

DRS A

5

1 GBAO

Kurgan-Tube

Cost of obtaining permits is rising The cost of obtaining all necessary permits has increased significantly from 2007 to 2005 for all segments of the SME sector (see chart 4.15). Small and medium companies spend the most on permits, and the cost of obtaining all permits has more than quintupled for those businesses which go through the permit procedure. Dehkan farms who received permits in 2007 also spent more than five times what they spent in 2005. The cost to individual entrepreneurs rose more moderately, to 122 somoni (about $35). Chart 4.17 - Small and medium companies spent 1,588 somoni ($458) to obtain all permits Average cost of all permits in somoni (including official and unofficial payments) among SMEs who obtained at least one permit8

8

1,588

2005 2007

71

122

Individual entrepreneurs # of permits received

3

365

225

44

Small and medium companies

4

Dehkan farms

3

7

Data represent companies with 5 to 200 employees (Source: Enterprise Surveys).

8

For small and medium companies, 2007 data show companies with 5 to 200 employees (Source: Enterprise Surveys), and 2005 data show companies with up to 200 employees (Source: IFC SME Survey).

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A regional comparison of the cost of all permits for shows wide variation in the financial burden of permits in parts of Tajikistan (see charts 4.18-4.20). Interestingly, the regional picture is not consistent across the SME sector. In other words, individual entrepreneurs in Dushanbe spend the lowest total amount on permits among regions, while small and medium companies in Dushanbe spend the most among regions. Chart 4.18 Individual entrepreneurs spent 257 somoni to obtain all permits in GBAO Average cost of all permits (including official and unofficial payments) among individual entrepreneurs who obtained at least one permit, in somoni and as % of annual turnover 257

12.9

166 105

149

97

74

3.4 0.2

Dushanbe

0.3 Kulyab

0.7 Kurgan-Tube

Cost of procedure, TJS

1.2 DRS A

Sughd

GBAO

Cost of procedure as % of turnover

Chart 4.19 - Small and medium companies spent 2,421 somoni to obtain all permits in Dushanbe Average cost of all permits (including official and unofficial payments) among small and medium companies who obtained at least one permit, in somoni and as % of annual turnover9 1.0

9

2,421 0.7 0.6 0.4

1,735

1,227

618

DRS A

Sughd

Cost of procedure, TJS

9

98

Dushanbe

Kurgan-Tube

Cost of procedure as % of turnover

Data represent companies with 5 to 200 employees (Source: Enterprise Surveys).

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PERMITS

Chart 4.20 - Dehkan farms spent 379 somoni to obtain all permits in Kurgan-Tube Average cost of all permits (including official and unofficial payments) among dehkan farms who obtained at least one permit, in somoni and as % of annual turnover 379

3.8 3.5

200

161

2.5

136

1.2

15 0.0 GBAO

DRS A

Kulyab

Cost of procedure, TJS

Kurgan-Tube

Sughd

Cost of procedure as % of turnover

See chart 4.21 for the average cost of one permit, by type of SME. Again, the increased cost of permits for small and medium companies in just two years is dramatic. In 2005, the total cost of one permit (including any unofficial payments) was 87 somoni (about $25) for a small and medium company. Those companies now spend an average of 934 somoni (about $270) for one permit, more than eleven times the 2005 cost. Chart 4.21 - The cost of a permit has increased for all segments of SME sector Average cost of one permit in somoni (including official and unofficial payments) among SMEs who obtained at least one permit 10 2005

934

2007

33

73

Individual entrepreneurs

10

87

33

Small and medium companies

103

Dehkan farms

For small and medium companies, 2007 data show companies with 5 to 200 employees (Source: Enterprise Surveys), and 2005 data show companies with up to 200 employees (Source: IFC SME Survey).

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Validity period of issued permits Some permits have to be renewed every year, such as permits issued by the Sanitary and Epidemiological Service (SES) or the premises conformity certificate for drugstores issued by Center on State Control over Pharmaceutical and Medical Activity. The appropriate length for a permit’s validity is not always defined in legislation, however. Permit issuing agencies do not generally specify lower fees or procedural steps for renewal of existing permits as opposed to an application for a brand-new permit. Thus, permits of a short validity impose substantial administrative burdens on firms, who must go through the entire permit process again. To minimize unnecessary disruptions to business operations and to reduce business costs, permits should be issued for as long a period as possible to achieve the public health and safety goals of the particular permit. Inspections, which can be conducted by an authorized inspectorate every two years, are an appropriate tool for regulatory authorities to verify that companies are abiding by health and safety standards. Proper usage of inspections should allow permit authorities to issue permits of a longer validity period. Most permits for small and medium enterprises are issued for 11 months, with individual entrepreneurs generally receiving permits of only ten month validity (see chart 4.22). Small and medium companies generally receive longer permits than does the rest of the SME sector. Chart 4.22 - Validity of the average permit in months Among respondents who have at least one permit 11 15

10

Individual entrepreneurs

Small and medium companies

13

Dehkan farms

Unofficial solutions common Lack of transparency in the permit requirements, procedures and fees creates an environment where unofficial solutions are common. Even if business owners take the time to learn their legal rights and responsibilities regarding permits, they will find that the legal framework is vague and does not answer their questions.

11

100

Data represent companies with 5 to 200 employees (Source: Enterprise Surveys).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits


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Survey results indicate that the percentage of small and medium enterprises who rely on unofficial solutions to their permit requirements has decreased with respect to 2005. This figure is still high, at 10% of permit recipients in the entire SME sector (chart 4.23). Chart 4.23 - In 2007, the number of SME who report using unof12 ficial solutions has decreased from 2005 Percentage of respondents who report using unofficial solutions, among those with at least one permit12 54 45 35

44

36 38

26

25

18 11

Individual entrepreneurs

10

Small and medium companies

2002

SME sector average

Dehkan farms

2005

2007

The World Bank’s Enterprise Surveys find that corruption is prevalent among the issuance of construction permits. Among large companies in Tajikistan (those with over 100 employees), 64% report that unofficial payments are expected during the construction permits process (see chart 4.24). Unofficial payments are less common in Georgia, Belarus and Azerbaijan than in Tajikistan. Chart 4.24 – Corruption is prevalent among issuance of construction permits to large Tajik firms 13

% of firms who responded that a gift or informal payment was expected or requested during process to obtain construction permits13 64

64

57

53 37

53 52

56

50

22 0

Small (5-19 workers) Georgia

56

34 25 12

7

53

42

35 25

Belarus

71

2

0

1

Medium (20-99 workers) Tajikistan

Ukraine

0

11

Large (100 or more workers) Uzbekistan

12

This question was not asked of dehkan farms in 2007. For small and medium companies, 2007 data show companies with 5 to 200 employees (Source: Enterprise Surveys); 2002 and 2005 data show companies with up to 200 employees (Source: IFC SME Survey).

13

Source: Enterprise Surveys

Kyrgyz Republic

13 2 Average firm Azerbaijan

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Existing vs. New Businesses Existing businesses spent less time and money obtaining permits than did businesses who registered in 2006 or 2007 (so-called ‘startups’). As chart 4.25 shows, these new businesses had more than three times the permit-related costs than did older businesses. Chart 4.25 - New small and medium companies spent considerably more than existing businesses did on permits in 2007 Cost for all permits in somoni14 3,392 existing business new business

1,389

122

240

109

Individual entrepreneurs

Small and medium companies

10

Dehkan farms

Most individual entrepreneurs who received permits in 2007 were new businesses. Perhaps because of their unfamiliarity with permit procedures, new individual entrepreneurs are much more likely to report using unofficial solutions than existing entrepreneurs (see chart 4.26). Chart 4.26 - 35% of existing businesses report using unofficial solutions Among respondents who obtained at least one permit in 2007 15 existing business

38

new business

36

11 4

3 Individual entrepreneurs

102

Small and medium companies

10

SME sector average

14

Small and medium company data represent companies with 5 to 200 employees (Source: Enterprise Surveys).

15

This question was not asked of dehkan farms. Small and medium company data represent companies with 5 to 200 employees (Source: Enterprise Surveys).

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4.3 - PROSPECTS FOR REFORM: THE “GUILLOTINE” APPROACH Most developing countries face the challenge of speeding up regulatory reforms to stimulate economic growth, create jobs, and raise living standards. Outdated and unnecessary laws and other regulations impose massive efficiency costs on economic activity, promote corruption, and reduce government performance in protecting people and the environment. Reforming regulations one at a time can exhaust reformers without producing any lasting benefits for businesses. A broad and coordinated approach is needed to significantly reduce unneeded regulatory costs. A rapidly spreading regulatory reform tool is the “regulatory guillotine”, designed to shift the direction of the reform process. Instead of reformers having to argue against every single inefficient piece of regulation, the burden of proof is shifted to the regulators, who must demonstrate the value of every piece of regulation. This simplification strategy was used in various forms by OECD countries in the 1990s, and since then has been adopted in many transition economies as well. The regulatory guillotine is a flexible method to rapidly review a large number of regulations and eliminate those that are no longer needed. It identifies the regulations that exist, and then reviews them against clear criteria, using an orderly and transparent process built on extensive stakeholder input. At the end of the guillotine process, a definitive list of regulations is developed. Regulations that do not make it onto the list become invalid, and they are eliminated. Box 4.2 provides an introduction to the regulatory guillotine.

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Box 4.2 -How does the “Guillotine” process for permits work? The guillotine process can be broken down into the following steps: --

the government establishes the scope of the Review,

-the government adopts a legal instrument that sets out the guillotine process, schedule, institutions, and criteria that define which regulations pass and which regulations fail. Three common criteria are: --

Is the permit necessary to protect public health and safety?

--

Is the permit legal (has it been published and is it authorized by parliamentary law)?

--

Is the permit business friendly?

The regulations regulating issuance of permits are passed through three filters or review processes. In each filter, unnecessary, outdated, and illegal rules are identified, and excluded from the list. In the first review, all government agencies establish lists of their regulations within the scope of the guillotine by a certain date, and justify those regulations that they want to keep. In the second review, the lists are reviewed by an independent review unit which carries out the same analysis of regulations that passed the first review. In the third review, the lists are reviewed by stakeholders and recommendations are given to the central review unit.

The Guillotine Strategy to Rapidly Reform Existing Regulations List of laws, regulations, & norms Ministries, inspectorates

2nd Review

1st Review

Third Review: Consultations with Businesses 1. is it needed? 2. is it efficient & market friendly?

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits

The Guillotine drops on a specific date. Only laws and regulations in legal database continue to exist

Public Access to Database via Internet

Second Review: independent group in Ministry of Economy 1. is it needed? 2. is it legal (has it been published)? 3. is it efficient & market friendly?

Secure legal Electronic Register

The Ministry of Economy review group considers the advice of businessess and develops the final list to go into the electronic database

104

All rules with ”yes” answers to three review questions go to 3 rd review

All rules with “yes” answers to three review questions go to 2 nd review First Review by inspectorates 1. is it needed? 2. is it legal (has it been published)? 3. is it efficient & market friendly?

3rd Review

GUILLOTINE Legal deadline

This process is repeated for all new regulatory requirements affecting businesses


PERMITS

International experience with the “guillotine” approach indicates that it works in a variety of contexts – both different country contexts and with different types of regulations (not just permits). See box 4.3 for examples of the impact of regulatory reform using the guillotine process.

Box 4.3 - Impact of the regulatory guillotine around the world… •

Mexico: Revised 2038 regulations – eliminating 54% and simplifying51%.

Hungary: Reformed 150 laws – increasing FDI, GDP growth and employment.

Moldova: Reviewed 1130 regulations – eliminated 211, amended 141, declared 292 illegal, and included 486 in the final registry.

Korea: Created 1,066,200 jobs, reduced public burden, reduced government costs by $613 million, generated $36.5 billion in FDI over 5 years.

Croatia: Reviewed 1451 regulations – eliminated or simplified 55%, generating more than $300 million in annual administrative savings.

Kenya: Reviewed 1325 licenses and permits – eliminated 315, simplified 379, generating private sector cost savings per year of $62 million.

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RECOMMENDATIONS 1. Develop a comprehensive inventory of all permits currently being issued, to guide reform efforts. Work with the private sector to identify which specific permits are the most troublesome.

2. Eliminate duplicative and unnecessary permits through a guillotine process. •

Utilize international experience when implementing the permits guillotine.

Establish guillotine criteria as necessity, legality, and business-friendliness of permits and review all permits on compliance with these criteria.

Reduce the universe of permits in Tajikistan.

Develop and publicize a comprehensive list of all permits approved for issuance to businesses in Tajikistan.

Use this process to lay the foundation for a solid legal framework for permits.

3. Adopt a Law on Permits to clarify and streamline the application and issuance processes of new permits.

106

Consider the importance of low barriers to entry and the promotion of economic competition when drafting the law.

Introduce suitable official costs for the permit procedure.

Clarify the process for introduction of new permits in Tajikistan.

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Attachment 4.1 - List of normative acts regulating permit procedures, based on IFC analysis Codes: 1

The Water Code of RT from October 20, №148

2

The Civil Code of the RT – from January 1, 2000

3

The Labor Code of the RT from May 15, 1997

4

The Land Code of the RT

5

The Customs Code of the RT Laws:

6

“On Operational-Investigative Activity” from 4.11.95, 196

7

“On Advertising” from 1.08.03, №34

8

“On National Frontier of RT” from 1.08.97, №481

9

“On Militia” from 17.05.04, №41

10

“On Circulation of Explosive Materials of Commercial Value” from 28.02.04, №1

11

“On Operational-Investigative Activity” from 23.05.98, №651

12

“On Weapons” from 1.02.96, №232

13

“On Fire Safety” from 21.07.94, 995

14

“On Pharmacon and Pharmaceutical Activities” from August 6, 2001, № 39

15

“On Protection of Atmospheric Air” from 1.02.96, №228

16

“On Private Medical Activity” from 2.12.02, №60

17

“On Foreign Investments in RT” from 10.03.92, №554

18

“On Food Quality and Safety” from 10.05.02, №54

19

“On National Bank of Tajikistan” from 14.12.96г. № 383

20

“On Banks and Banking Activity” from 23.05.98, №648

21

“On Micro-Finance Institutions” from May 17, 2004, №38

22

“On Securities and Stock Exchanges” from 10.03.92, №552

23

“On Accounting” from 14.05.99, №750

24

“On Radiation Safety” from 1.08.03, №42

25

“On Subsurface Resources” from 20.07.94, №983

26

“On Labor Protection in RT” from 24.12.91, №460

27

“On Storage of Pry and Wastes of Black and Base Metal” from 28.02.04, №2

28

“On Production and Safe Handling of Pesticides and Agrochemicals” from 22.04.03, №1

29

“On Veterinary Medicine” from 8.12.03г. №73

30

“On Competition and Limitation of Monopolistic Activity on Commodity Market” from 28.07.06, №198

31

“On Plant Quarantine” from 12.05.01, №25

32

“On Product and Service Certification” from 13.12.96, №313

33

“On Measurement Assurance” from 15.05.97, №435

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits

107


4

34

“On Museums and Museum Fund” from 28.02.04, №15

35

“On Culture” from 13.12.97, №519

36

“On Press and Other Mass Media Communications” from 14.12.90, №199

37

“On State Control of Arms and Double-purpose Production Export” from 13.12.97, №521 Government Resolutions:

38

Republic of Tajikistan Government’s Regulation №554 from 1.12.01. Regulation for the order of development of design-built (installations), acquisition, exploitation on the ter-

39

ritory of RT and import of radio electronic facilities and high frequency appliances, approved by Ministers Board Order of the Republic of Tajikistan from August 1, 1994, № 371

40

Republic of Tajikistan Government’s Regulation “On reinforcement of fire safety in RT” from 5.10.01, №457

41

Road regulations, approved by the Republic of Tajikistan Government’s Regulation №565, from 27.12.97

42 43 44 45 46

RT National emblem image process order and its large scale copying, as well as its usage, preservation of the national emblem, approved by the RT Ministers Board Order from August 11, 1993, № 395 Regulation for State fire safety supervision authority in RT, approved by the Republic of Tajikistan Government’s Regulation from 7.12.95, №726 Import and export order of pharmacon and medical products in RT, approved by the Republic of Tajikistan Government’s Regulation from June 5, 2002, № 245 Pharmacon and medical supplies imports and exports order, approved by the Republic of Tajikistan Government’s Regulation from 31.03.04, №139 State center for control of pharmaceutical activity (SCCPA) statute, approved by the Republic of Tajikistan Government’s Regulation from August 29, 2003, № 382 Regulations on the order of building of deposit surface of commonly occurring mineral resources, as well as

47

distribution in places of substructures deposit, not related to mining, approved by Resolution of the Cabinet of Ministers of the TSSR from 16.12.83, №365 Regulation for the Committee of Safe Operation State Control in productions sector and mines inspectorate

48

under the Government of RT, approved by the Republic of Tajikistan Government’s Regulation №124 from 2.04.05

49 50 51 52

Regulation for state committee of environmental and forest sector defense, approved by the Republic of Tajikistan Government’s Regulation №70 from 1.03.04 Regulation on Ministry of Economic Development and Trade from 28.12.06, №589 Regulation on the Ministry of Labor and Social Protection in RT, approved by the Republic of Tajikistan Government’s Regulation №124 from 7.03.01 Regulation on architecture and urban construction agencies in GBAO, regions, towns and districts of RT, approved by the Republic of Tajikistan Government’s Regulation №127 from 17.04.98 Regulation on State Project Expertise and examination department of construction under the Committee of

53

architecture and construction under the Government of RT, approved by the Republic of Tajikistan Government’s Regulation from December 25, 1997, № 553

54 55

108

Regulation on State Committee for Radio Frequency Allocations in RT, approved by the Republic of Tajikistan Government’s Regulation from 2.08.04, №331 Regulation for permit for transportation means to use automobile roads with a size exceeding enforceable standards, approved by the Republic of Tajikistan Government’s Regulation from 29.12.06, №779

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits


PERMITS

56

Regulation on DCA in RT, approved by the Republic of Tajikistan Government’s Regulation from 31.08.04, №361

57

Regulation on the Ministry of Energy and Trade of RT from 28.12.06, №605

58

Regulation for the Ministry of amelioration and water storages in RT from December 28, 2006, №595 Regulation for frontier zone and borderland in the territory of RT, entry regulations, sojournment, habitation,

59

movement, execution of works, record and support of water salvage in frontier zone, approved by the Republic of Tajikistan Government’s Regulation from 6.06.03, №251 Resolutions of Ministries and Agencies:

60 61 62 63 64 65 66

Regulation on the order of making up formulas of medical agents and their sale from pharmacy institutions, approved by the Ministry of Health from 23.12.02, № 380 Regulations on the order of safe destruction of medical, unconformable with operating standards in RT, approved by the Ministry of Health 16.12.02, №370 Instructions for approval procedure and issue of permits on special water use, approved by the chairman of State Committee of environmental and forest sector defense in RT from January 20 2005 Regulation on the order of accreditation of pharmaceutical institutions and physical bodies, occupied with pharmaceutical activities in RT, approved by the instruction of (SCCPA) from May 3 2006, № 24. Regulations for assessment and accreditation procedures of health system laboratories, approved by the order of the Minister of Health of RT from 6.06.02, №162 Regulations for State Inspectorate of telecommunications under the Ministry of Telecommunications of RT, approved by the order of the Minister of telecommunications from 13.03.98, №17 Instruction of Tajik State Energy Control № RTM – 01.01.01.-00 от 1.06.00 “On the order of origin of an electrical installation”,

67

Regulation of the National Bank of Tajikistan, №118 from 28.01.02,

68

Regulation of the National Bank of Tajikistan On Pawnshop from 23.03.00, №48

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits

109


4

Attachment 4.2 - List of permit issuing agencies, based on IFC analysis Ministry/Agency 1

Government

Khukumat local

2 3

Permit-issuing body

Khukumat RT Ministry of Agriculture and Environmental Protection

Central Department Agency for State control over environment exploitation

4

and environment

5

Veterinary

6

Quarantine

7

State Technical Surveillance

8

Agency for Ecological control Environmental Protection

9

Ministry of Internal Affairs

10

Republican Internal affairs

11

Road police (GAI)

12

Fire authority

13

Ministry of Health

14

16

Central Department Sanitary and Epidemiological Service Center for State Control Over Pharmaceutical and

15

Medical Activity Ministry of Transport and Communication

Central Department

17

State inspection on communication

18

Agency for automobile road management

19

Agency for railway management

20

State Agency for transport regulation

21

Department for Civic Aviation

22

State Commission on Radiochastot

23

Ministry of Energy and Industry

Central Department

24

Energy distribution Barki Tojik

25

Energy surveillance

26

TajikGas

27

Ministry of Labor and Social Protection

28 29

Central Department Agency for control over labor and social protection

Ministry of Economic Development and Trade

30

110

Regional Internal affairs

Central Department Antimonopoly agency

31

Ministry of Water Resources and Amelioration

Central Department

32

Ministry of Education

Central Department

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits


PERMITS

33

Ministry of Culture

Central Department

34

Ministry of Finance

Central Department

35

Central Department of Geology under the Govern-

Central Department

36 37 38

ment

State Fund of geological information about royalty

Agency for land, geodesy and mapping under the Government Agency for Construction and Architecture under the Government Central Department of State Technical Surveillance on

39

Safety Work in Industry and Mining Control under the Government

40 41

State Committee of Statistics Agency for Standardization, Metrology, Certification and Trade Inspection under the Government

42

Customs Service under the Government

43

Agency on Drug Control under the President

44

National Bank of Tajikistan

45

Agency for radiation safety

46

Agency for usage of flammable materials

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Permits

111


Chapter 5 - Access to finance


5

Chapter 5 – Access to finance Key Survey Findings --

20% of individual entrepreneurs have a loan or line of credit, but just 7% have a bank account.

--

Just 22% of dehkan farms have a bank account in 2007, compared to 47% in 2002.

--

Only 86% of small and medium companies have a bank account, low even by regional standards.

--

F emale individual entrepreneurs have consistently better access to credit than their male counterparts do. Female dehkan farms, however, are more than twice as likely to be turned down for loans as their male counterparts are.

--

S MEs overwhelmingly cite unfavorable interest rates as the reason they don’t apply for financing. Their concern is justified, as Tajikistan’s lending margins are high compared to others in the region and worldwide.

--

One in five SME borrowers was required to provide collateral in 2007, continuing a steep decline since 2002. The main reason for rejection of a loan application is the inability to provide sufficient collateral (55% of rejected borrowers).

--

The share of SMEs making investments in fixed assets continues to decline steeply, from 40% in 2002 to just 15% in 2007.

The Tajik financial system has grown rapidly in recent years, although it remains small. There are twelve commercial banks (including one state-owned bank and two foreign banks), seven credit societies, one non-bank financial institution and eightyeight microfinance institutions operating in Tajikistan as of January 1, 2009. Bank deposits have grown rapidly and at an increasing rate since 2004. The microfinance sector of Tajikistan has expanded especially rapidly. Lending by microfinance organizations grew by more than 200% in 2006 and another 120% in 2007. Microfinance organizations had more than 150,000 borrowers in 2008, who received 466 million somoni total (about $135 million) in microcredits from these organizations.1 Despite the rapid growth of loan volumes, 70% of SMEs have yet to develop relationships with financial institutions. It is difficult for them to provide suitable collateral for traditional bank loans.2 All land is state-owned, and the legal framework governing the pledging of land use certificates is unclear. Development and usage of collateral registries, for movable property like equipment and for immovable property such as land, would both reduce risk to lenders and allow borrowers to make full use of their existing assets. The process to formalize and register collateral is currently complicated and expensive. Lending, especially to SMEs, is also limited by the lack of a creditor information system. A creditor information system, such as a credit bureau, would permit borrowers to build a credit history and allow

114

1

National Bank of Tajikistan Banking Statistics Bulletin, February 2009.

2

Many microfinance organizations provide loans without collateral.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

banks to make lending decisions based on the borrower’s credit history. Over-indebtedness may be developing into a serious problem as borrowers take multiple loans, or take new loans to repay old ones, rather than taking new loans for additional investment in equipment or materials. In the absence of strong credit assessment, lending is ‘rationed,’ i.e., financial institutions tend to reduce their risk by limiting their credit exposure, in terms of number of borrowers and/or size of the loans or by applying risk mitigating factors. These factors include limiting the exposure to a very short period, lending mainly to clients with whom they have a prior relationship, and requiring high interest rates and/or a high level of collateral. To address the increasing risks in the financial system, Tajik banks must develop robust credit risk management capacities, and the government must improve the governance, regulatory, and supervisory frameworks of the system. Improvements beyond the financial sector itself, such as strengthening the rule of law regarding property rights and enforcement of loan agreements, may also be required to gain the full benefit of reforms in the sector.

5.1 - Context: Tajikistan’s Financial System is Underdeveloped Even though virtually all indicators of financial depth have improved in recent years, the Tajik financial sector remains shallow relative to comparator countries (see charts 5.1 and 5.2).3 The ratio of deposits-to-GDP averages about 30% for low-income countries, 55% for middle-income countries, and 85% for high-income countries, yet in Tajikistan this ratio is just 11% in 2008. Chart 5.1 - Tajik financial system is still small by regional standards4 Bank assets as a percentage of GDP, December 2008

4

140 120 80 40

3

See the World Bank’s Country Economic Memorandum for Tajikistan (Forthcoming) for a more extensive explanation of the causes and consequences of Tajikistan’s underdeveloped financial system.

4

Source: World Bank. Data for Uzbekistan is for 2007.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance

Estonia

Latvia

Croatia

Hungary

Bulgaria

Ukraine

Czech Republic

Lithuania

Kazakhstan

Slovakia

Poland

Russia

Romania

Turkey

Uzbekistan

Tajikistan

0

115


5

Chart 5.2 - Deposits as a percentage of GDP, December 20085 60

40

20

Bulgaria

Hungary

Estonia

Croatia

Poland

Turkey

Latvia

Ukraine

Lithuania

Russia

Romania

Kazakhstan

Belarus

Georgia

Azerbaijan

Tajikistan

Armenia

0

The loan-to-GDP ratio, as well as the deposit-to-GDP ratio, continues to increase (see chart 5.3). The rapid growth in loans and deposits is positive in that it supports deepening of the financial system, and it may indicate growing public confidence in banks. However, Tajikistan’s deposit insurance system does not have the asset base to function effectively in the event of a failed deposittaking organization. Unless the quality of banking supervision and credit risk management improves proportionally, this growth also presents a significant risk of the build-up of non-performing debts across the system. 6

Chart 5.3 - Strong recent growth in depth of Tajik financial system Loan-to-GDP and Deposit-to-GDP ratios6

31

28

25 18 13

12

11

4

5

5

2002

2003

2004

19

18

11

7

2005

2006

2007

20086

Deposit-to-GDP ratio, in % Loan-to-GDP ratio, in %

The 2004 Law on Microfinance permits licensing of three types of microfinance organizations: microcredit funds, microcredit commercial organizations, and microcredit deposit-taking institutions. Microcredit deposit-taking organizations and microlending organizations require licenses issued by the National Bank of Tajikistan

116

5

Source: World Bank

6

Source: NBT, http://www.nbt.tj/?c=176&id=217, (as of 04.29.2009). Banking statistics bulletin / 12 (137), Dushanbe 2006. Preliminary data, subject to corrections by National Bank of Tajikistan upon arrival of correct figures on GDP from the State Statiatics Committee. (Source NBT).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

(NBT). Microlending funds, on the other hand, are non-commercial organizations set up as social funds, and they need only a certificate to operate. Further development of the financial system is hampered by a large, outstanding stock of distressed cotton debt. In the past, the government has directed significant financing to the cotton sector through KreditInvest, but loan repayment has been very poor.7 Falling world cotton prices, weather-related bad harvests, and inadequate record-keeping on loans and collateral have led to a steady build-up of non-performing debts. KreditInvest accounted for a significant share of credit to the private sector, and Tajikistan’s low performance on this indicator of financial depth is apparent when credit from the insolvent KreditInvest is removed (see chart 5.4). 8

Chart 5.4 - Tajikistan lags behind the region in lending to the private sector Credit to the private sector, as a percentage of GDP, December 20088 100 80 60 40 20

Estonia

Latvia

Blgaria

Ukraine

Hungary

Lithuania

Kazakhstan

Poland

Slovakia

Russia

Romania

Moldova

Georgia

Belarus

Tajikistan w/ cotton

Kyrgyz Republic

Azerbaijan

Tajikistan w/o cotton

Uzbekistan

0

In 2008, the Tajik government budget allocated 140 million somoni for financing of the cotton sector, to be channeled to cotton farmers through commercial banks at subsidized interest rates. This scheme greatly improves transparency of cotton financing, but it poses significant liquidity and solvency risks for banks and should be revised. The cotton debt problem is complicated, but its resolution is essential – for the cotton farmers, the broader agricultural sector, and the financial system. In addition to the weaknesses above that directly impact access to finance for SMEs, there are other weaknesses that affect the financial sector, which require attention and action from Tajik authorities 7

KreditInvest is an insolvent asset management company at the heart of the cotton debt problem. For an in-depth explanation of the cotton debt issue, see “Advisor’s Report on Cotton Debt Resolution” by Tapio Saavalainen, international debt advisor to the Government of Tajikistan, March 12, 2009.

8

Tajikistan is shown with and without credit from KreditInvest. Data for Uzbekistan ad the Kyrgyz Republic are for 2007. Source: World Bank.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance

117


5

Box 5.1 - Recommendations to improve the Tajik financial system Main short-term recommendations of the IMF and World Bank joint Financial System Stability Assessment, June 25, 2008: 1.

Strengthen the surveillance framework to monitor the build-up of credit risk in the banking system to ensure that problems, if and when they emerge, can be addressed promptly.

2.

Develop and implement a strategy for the resolution of cotton debt. Key first steps should be an immediate halt to KreditInvest’s non-asset-management-related commercial activities, followed by its comprehensive due diligence audit. KI may need to be resolved in the context of a comprehensive plan for the cotton sector.

3.

Strengthen the governance and autonomy of the NBT. In particular, rules for the appointment, dismissal, and terms of office of the chairman and Board members should be spelled out and clear provisions on conflict of interest should be introduced in the law.

4.

The NBT should be recapitalized, including through the securitization of the government debt it holds. Further, the NBT must not resume commercial lending operations.

5.

Strengthen the legal framework for bank licensing, by reintroducing legal provisions on the NBT’s authority to license banks, and allow the NBT to check on the suitability of beneficial owners of banks.

6.

Implement preventive measures to combat money laundering and the financing of terrorism.

7.

Launch a program of issuance of government securities, which would help develop the bond market and strengthen NBT’s monetary framework.

8.

Continue strengthening the bank regulatory and supervisory framework, including by submitting public banks to annual independent external audits.

but are beyond the scope of this report. See box 5.1 for summary recommendations of the IMF and World Bank joint Financial Sector Assessment Program, which are based on a comprehensive review of issues in the Tajik financial system. Some progress has already been made on implementing the Financial Sector Assessment recommendations. The several weaknesses in Tajikistan’s financial system, combined with the generally difficult business environment, manifest themselves in high interest rate spreads. High interest rate spreads mean that bank lending is directed to relatively risky, but high-yielding, projects. For businesses, these high spreads make bank loans very expensive. As indicated in section 5.2, Tajik entrepreneurs cite the high interest rates for loans as the number one reason they don’t apply for bank loans. As chart 5.5 shows, Tajik commercial banks have especially high margins between deposit and loan rates for short term funds. As most individual entrepreneurs are traders, they often require shortterm funds to finance operations. Compared to 2005, average loan rates fell in 2008 for loans between one and twelve months (see chart 5.6).

118

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Chart 5.5 – Relation between deposit and loan rates in somoni, average for 20089 27.9

26.0

24.3 14.2

13.8

24.0 18.4

26.4 19.1

7.8

up to 1 month

1-3 months

% Deposit rate

3-6 months

6-12 months

12+ months

% Loan rate

Chart 5.6 – Average loan rates have fallen for many loan categories Nominal interest rates on deposits in somoni of banks and nonbanking financial organizations, average for 2005 and for 200810 25.4

27.9

up to 1 month

28.9

26.0

1-3 months

2005 % Loan rate

30.9 24.3

3-6 months

27.6 24.0

25.626.4

6-12 months

12+ months

2008 % Loan rate

Early impacts of the global financial crisis As of early 2009, Tajik banks have largely been spared the heavy losses occurring in more sophisticated banking systems due to the current financial crisis. While the Tajik banking system is only lightly integrated into the international financial system, the crisis will negatively impact the banks’ source of financing as foreign lenders become increasingly risk-averse. Decreased access to capital is already a reality for many financial institutions. Worker remittances, primarily from Russia, are the main source of foreign exchange, having overtaken receipts from cotton and aluminum exports. The financial crisis will lead to reduced remittances, but less than 5% of remittances remain in the banking sector as deposits. Thus the drop in remittances, predicted to be 30% less in 2009 than in 2008, should not greatly affect deposit volumes. However, any drop in remittances will have broad repercussions throughout the economy and society, as remittances accounted for about 50% of GDP in 2008. 9

Source: National Bank of Tajikistan Banking Statistics Bulletin, February 2009.

10

Source: National Bank of Tajikistan Banking Statistics Bulletin, February 2009

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance

119


5

Loan dollarization increased from 57% in 2004 to 63% in 2008.11 Financial institutions use this mechanism for lack of another efficient mechanism to hedge risks. Increasing loan dollarization creates exchange rate-induced credit risk, as borrowers who operate in Tajik somoni may be unable to repay their dollarized loans in the event of somoni depreciation. The financial crisis led to a significant depreciation in Tajikistan’s exchange rate, which floats freely. The somoni lost over a quarter of its value against the dollar in six months, from 3.43 somoni to the dollar in January 2009 to 4.40 somoni by June 2009. This depreciation makes it harder for most borrowers to pay off their dollar-denominated loans, and Tajik banks are experiencing a rise in their non-performing loans. It is difficult, however, to disentangle the effects of the financial crisis (and somoni depreciation) from the effects of the new government cotton financing scheme, which has also influenced the deterioration in prudential indicators.

5.2 - key survey findings: Access for finance is improving, but slowly The access of small and medium enterprises to the financial sector has grown but remains quite limited. As most transactions are still conducted in cash, few Tajik SMEs use banking services. Bank accounts are more common than loans or lines of credit, except for individual entrepreneurs, who are almost three times as likely to have a loan as a bank account (see chart 5.7)12. Individual entrepreneurs, with smaller revenues than small and medium companies, are more likely to utilize microfinance services. Most microfinance organizations are not authorized to take deposits, but they can make loans. Chart 5.7 – SMEs have limited involvement with financial institutions % of respondents with bank account and those with loan13 Dehkan farms

16

22

Small and medium companies

Individual entrepreneurs

31 7

20 Bank account

120

86

Loan

11

Loan dollarization refers to the value of loans made in USD as a percentage of the total loan portfolio of banks.

12

Throughout this chapter, loans and lines of credit are used interchangeably, and referred to collectively as credit, since the survey questions in every case asked about “loan or line of credit.”

13

Data for small and medium companies refers to legal entities with between 5 and 200 employees (Source: Enterprise Surveys).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Access to loans and lines of credit are vital for business growth. They provide a mechanism for investments in equipment, construction, raw materials, employees and other inputs. The share of Tajik companies with a loan is about average compared to other formerly Soviet countries (see chart 5.8).14 Chart 5.8 - Percentage of Tajik companies with a bank loan is average by regional standards15 % of companies with a line of credit or loan from a financial institution 49.5 41.8 31.7

33.6

Ukraine

Tajikistan

10.5

Uzbekistan

Georgia

Belarus

Loans may also provide more than economic benefits. In credit impact assessments conducted in 2005 through 2007, the Association of Microfinance Organizations of Tajikistan (AMFOT) found that 71% of microfinance clients experienced an increase in nourishment as a consequence of their loan, 42% reported higher self esteem, and 36% saw better perspectives for the future.

SME sector still largely unbanked The percentage of dehkan farms with a bank account continues to drop dramatically, from almost 1 in 2 in 2002 to just over 1 in 5 in 2007. As shown in Chapter 1, the average dehkan farm was almost one-third smaller in revenue terms in 2007 as in 2005, thus this decline is most likely related to the diminishing size of the average dehkan farm. The rest of the SME sector is now more likely to have a bank account, although the improvements are relatively small. See chart 5.9. Still only 7% of individual entrepreneurs have a bank account, just a one percentage point growth from 2002. This underutilization of banks probably reflects lingering distrust of the banking system, as many Tajiks remember the dramatic devaluation of their rubledenominated accounts following the collapse of the Soviet Union.

14

According to Enterprise Survey data, Tajik and Uzbek companies are 3 to 5 times smaller than their counterparts in Belarus, Georgia and Ukraine.

15

All data refers to legal entities with 5 or more employees (Source: Enterprise Surveys).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance

121


5

Chart 5.9 – Few SMEs have bank accounts % of respondents with a checking16or savings account16 15 15 18

SME sector average

22

Dehkan farms

30

47 81 82

Small and medium companies

5

Individual entrepreneurs

86

7 6

2002

2005

2007

When companies register in Tajikistan, they are required to open a bank account and deposit up to 50% of the nominal capital required. Many small and medium companies open temporary accounts to meet this requirement, but do not then use the bank account for business purposes. The significantly higher percentage of companies with a bank account, as compared to individual entrepreneurs and dehkan farms, may be due to this registration requirement. In 2007, 87% of Tajik companies with more than 5 employees had a bank account. In a developed economy, one would expect virtually 100% of small and medium companies to have a bank account, and even in developing countries virtually all firms have a bank account. Surveys conducted in 2006 confirm that 100% of small and medium companies in six Latin American countries have a deposit or savings account17. Companies in other formerly Soviet countries are more likely to have a bank account than are Tajik firms (see chart 5.10). Chart 5.10 - Percentage of Tajik companies with a bank account is low by regional standards18 % of companies with a checking or savings account 90.1

90.8

92.3

93.7

86.9

Tajikistan

122

Ukraine

Georgia

Belarus

Uzbekistan

16

For small and medium companies: 2007 data refers to companies with between 5 and 200 employees (source: Enterprise Surveys). 2002 and 2005 data refers to companies with up to 200 employees.

17

FRS (Inmark Group) Survey of SMEs in Argentina, Chile, Colombia, Mexico, Peru, Puerto Rico and Venezuela (2006) as reported in WB paper “Bank Involvement with SMEs: Beyond Relationship Lending” March 2008.

18

All data refer to legal entities with 5 or more employees (Source: Enterprise Survey).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

As one might expect, availability of a bank account is correlated with the size of the firm. Most companies with six or more employees have a bank account, and 97% of those with over 50 employees have a bank account (chart 5.11). There is an even stronger correlation between size of dehkan farms and presence of a bank account, although those with more than 50 employees are less likely to report having a checking or savings account than their smaller peers (chart 5.12). Chart 5.11 - Most Tajik companies with over 6 employees have a bank account % of small and medium company respondents with a checking or savings account 92

93

6 to 10 employees

11 to 20 employees

97 83

56

2 to 5 employees

21 to 50 employees

over 50 employees

Chart 5.12 - Up to 50 employees, larger dehkan farms are more likely to have a bank account % of dehkan farm respondents with a checking or savings account 47 32 5 2 to 5 employees

31

18

6 to 10 employees

11 to 20 employees

21 to 50 employees

over 50 employees

Access to credit in 2002, 2005 and 2007 In Tajikistan, loans and lines of credit can be provided by the stateowned bank (Amonatbank), state agencies, private commercial banks, or non-bank financial institutions (such as microfinance organizations). Since 2002, there have been clear improvements in the share of SMEs that turn to the financial system for loans, especially among individual entrepreneurs and dehkan farms. Among many other factors, these improvements reflect the efforts of financial institutions, the government, and international donors to develop the banking sector in general, and in particular lending to farms and to smaller businesses.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance

123


5

The microfinance sector has grown strongly in Tajikistan since 2002, not only in terms of loan volumes but also in the increasing number of organizations offering microfinance and the number of villages served by a microfinance organization. As microfinance organizations market their products in increasingly remote areas, they increase SME awareness about the availability of credit and how to receive it. The same percentage of individual entrepreneurs report needing outside funding in 2007 as in 2005, yet they are now more than twice as likely to apply. Even with increased applicants, 90% of individual entrepreneurs’ applications were approved. See chart 5.13. Chart 5.13 – Access to credit improved for individual entrepreneurs19 10 39 66 90 61 34

Did your company need external funding in 2007?

If yes...did you apply for a loan or line of credit?

If yes...did you get the loan or line of credit?

No Yes

% of individual entrepreneurs who replied yes

94 90

61 34

29

35

8 Did your company need If yes... did you apply for a If yes... did you get the external funding? loan or line of credit? loan or line of credit? 2002

2005

2007

Dehkan farms saw even larger improvements in access to credit. Compared to 2005, more dehkan farms needed external financing, more applied for a loan, and more received a loan in 2007 (chart 5.14). While these figures are encouraging, dehkan farms still report access to finance as their number one obstacle in the 19

124

Respondents were given several possible sources for the loan or line of credit, including private banks, the state-owned bank, microfinance organizations, credit cooperatives, credit unions or finance companies. Loans from relatives are not included, although they would bring the third column to 92%.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

business environment (see Executive Summary). As charts 5.135.15 show, dehkan farms are most likely to report needing external funding. Banks such as TajPromBank, TojikSodirotBank and First Microfinance Bank are investing in the development of better credit risk rating procedures for farmers. Chart 5.14 - Access to credit improved for dehkan farms

46

46

54

54

Did your company need If yes... did you apply for external funding in 2007? a loan or line of credit?

33

67

If yes... did you get the loan or line credit?

No Yes % of dehkan farms who replied yes

67 57

54

54 48 39

20 13

17

Did your company need If yes... did you apply for a If yes... did you get the external funding? loan or line of credit? loan or line of credit? 2002

2005

2007

Even though 46% of small and medium companies report needing financing in 2007, only 34% actually applied for it (see chart 5.15). While small and medium companies are now slightly less likely to apply for a loan, their loan approval rates continue to increase.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance

125


5

Chart 5.15 – Loan approval rates for small and medium companies improved20 11 54

66 89

46

34

Did your company need If yes... did you apply for external funding? a loan or line of credit?

If yes... did you get the loan or line of credit?

No Yes % of small and medium companies who replied yes

89 73

50

37

46

35

34 28

Did your company need If yes... did you apply for external funding? a loan or line of credit? 2002

2005

If yes... did you get the loan or line of credit? 2007

The World Bank’s Enterprise Survey data indicate that access to finance becomes more limited as firms grow larger. While larger firms are most likely to apply for loans, they are also most likely to have their applications turned down (see chart 5.16). One possible reason for their higher loan rejection rate is their inability to meet the higher collateral requirements demanded for larger loans. Among respondents to the Enterprise Survey, one in three large firms (those with over 100 employees) cite access to finance as a serious obstacle, about ten percentage points higher than the average for all Tajik firms. Chart 5.16 - Smaller firms are more likely to receive loan approval % of companies who replied yes 94 88 59

75

Medium (20-99 employees)

35

Large (100+ employees)

33 Did you apply for a loan in 2007? 20

126

Small (5-19 employees)

If yes... did you get the loan?

For 2007, data for the second two questions (‘Did you apply for a loan?’ and ‘Did you get a loan?’) come from the World Bank Enterprise Survey. For this chart, the 2007 data refer to companies with 5 to 200 employees, and the 2002 and 2005 data refer to companies with 1 to 200 employees.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Factors in the loan decision Loans among the three SME groups (individual entrepreneurs, small and medium companies, and dehkan farms) vary in terms of size and source. According to the survey, individual entrepreneurs and dehkan farms receive loans of similar sizes; 16,000 TJS (about $4,500) and 18,000 TJS (about $5,150) are the respective average loan sizes. The average loan to a small and medium company is more than 20 times as large, at 407,000 TJS (about $118,000).21 About half of dehkan farms rely on the state-owned bank or state agencies for loans (see chart 5.17). Individual entrepreneurs take loans from a variety of sources, including private commercial banks, non-bank financial institutions (like microfinance organizations), and the state-owned bank. 22

Chart 5.17 – Source of most recent loan for individual entrepreneurs, small and medium companies and dehkan farms23 Percentage of respondents, among those with a loan or line of credit Source of most recent loan for individual entrepreneurs

Source of most recent loan for small and medium companies

26%

8%

Source of most recent loan for dehkan farms 4%

2%

14%

43%

35%

31%

39% Non-bank financial institution

47% Private commercial banks

51% State-owned bank and/ or government agency

Other

Small and medium companies are more likely than either individual entrepreneurs or dehkan farms to borrow from private commercial banks. Analysis of the survey responses by number of employees shows that the larger the firm, the more likely it is to rely on private commercial banks for loans (chart 5.18). Non-bank financial institutions, continue to play an importing financing role for companies with under 100 employees.

21

Among companies with between 5 and 200 employees (Source: Enterprise Surveys).

22

Charts 5.13-5.14 show data for respondents who did receive a loan. “Non-bank financial institutions” refer to microfinance organizations, credit cooperatives, credit unions or finance companies. “Other” loan sources include loans from friends and relatives.

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5

Chart 5.18 – Larger companies are more likely to use private commercial banks Source of most recent loan for small and medium companies, by firm size23 3 4

13

21 53

Other Non-bank financial institutions

29

State-owned bank or government agency

87

Private commercial banks

50

39

Small (5 to 30 employees)

Medium (31 to 99 Large (100 to 200 employees) employees)

Among SMEs who did not apply for a loan, the overwhelming reason was the unfavorable interest rates they faced. While interest rates have come down slightly from 2006 to 2008, loans of over one year still require a 22% interest rate. It is interesting that SMEs cite unattainable collateral requirements as only the fourth most important constraint in the decision to apply for a loan, given that it is the primary reason for loan rejection (see following section). Considering also the low percentage of SMEs who believe they wouldn’t be approved for a loan, it is clear that the large share of SMEs who need financing and choose not to apply for a loan do so because the terms of the loan products on offer do not meet their financing needs. 24

Chart 5.19 - High interest rates are a key constraint for potential borrowers Among those who needed external financing and didn’t apply for a loan, the % identifying each of the following as the MAIN reason24 56

62

Individual entrepreneurs

45

Small and medium companies

12

Unfavoratable interest rates

128

16 15

Insufficient loan size/maturity

20

Dehkan farms

13 11

Complex application procedures

8

12

7

Unattainable collateral requirements

3

1

5

Wouldn’t be approved

5

0

0

Informal payments needed

7

2

0

Other

23

“Non-bank financial institutions” refer to microfinance organizations, credit cooperatives, credit unions or finance companies. “Other” loan sources include loans from friends and relatives.

24

Small and medium company data refers to companies with between 5 and 200 employees (Source: Enterprise Surveys).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Collateral requirements and loan rejection Survey responses indicate that more than half of rejected loan applications in 2007 were due to insufficient loan collateral (see chart 5.20). In 2005, insufficient collateral was also the leading reason for loan rejection. Interestingly, in 2005 individual entrepreneurs were more likely to have a loan rejected for collateral insufficiency (61%), but small and medium companies were less likely (33%). 25

Chart 5.20 - Main reasons why individual entrepreneur and small and medium company loans were rejected in 200725 According to survey respondents Main reasons why individual entrepreneurs loans were rejected in 2007

Main reasons why small and medium companies loans were rejected in 2007

10%

5%

8%

55%

12% 14%

Insufficient loan collateral Lack of initial project capital Project seen as unprofitable Other

54% 24%

Unwillingness to make unofficial payment

18%

Poor business plan

Seventy-one percent of SME borrowers were required to provide collateral in 2007 (chart 5.21). This represents an increase from 2005, when 50% of SME borrowers had to provide collateral, but is nearly equivalent to the data from 2002. Individual entrepreneurs are most likely to pledge their own personal assets to receive a loan, while dehkan farms and small and medium companies are more likely to pledge land or buildings.

Chart 5.21 - Most SME loans require collateral Among those who have loans or lines of credit from banks (private and state-owned) and microfinance organizations, the % who were required to provide collateral26 88 71

60

71

Individual entrepreneurs

2002

84

84 62

62 48

Small and medium companies

2005

Dehkan farms

2007

25

This question was not asked from dehkan farmers.

26

For small and medium companies: 2007 data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys). 2002 and 2005 data refer to companies with up to 200 employees.

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5

Chart 5.22 - Types of collateral provided for most recent loan or line of credit of SMEs27 % of respondents, among those who provided collateral for a loan or line of credit in 2007 48

Land or building owned by establishment

18 38

Personal assets of owner

12

Machinery and equipment, including movables

25

43 42

31

11 11 15

Other

Accounts receivable and inventories

55

0

1

Dehkan farms Small and medium companies Individual entrepreneurs

4

Individual entrepreneurs face much higher collateral requirements than Tajik companies or dehkan farms do (chart 5.23). One reason for the higher collateral requirement is the relatively small average loan size combined with the limited fixed assets of individual entrepreneurs. Note that only 18% of individual entrepreneurs who provide collateral do so in the form of land or buildings, which is the generally preferred collateral type for lenders. Chart 5.23 - Collateral requirements are highest for individual entrepreneurs Among respondents who provided collateral for a loan or line of credit in 2007, collateral required (% of principal amount)28 382

236

279 224 140 151

Individual entrepreneurs

153 93

Small and medium companies

94

Dehkan farms

Private commercial banks State-owned bank and/or government agencies Non-bank financial institutions

130

27

Figures add up to more than 100%, because respondents could select more than one answer. Small and medium company data refers to companies with between 5 and 200 employees (Source: Enterprise Surveys).

28

Small and medium company data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Individual entrepreneurs who borrow from non-bank financial institutions, such as microfinance organizations, report the highest collateral requirements, at 382% of the principal. Whether lending to individual entrepreneurs, companies, or dehkan farms, private commercial banks have lower collateral requirements than the state-owned bank.

Despite improving access to finance, SMEs make fewer investments into their businesses Tajik entrepreneurs seldom make investments into fixed assets. According to the survey, only 1 in 5 SMEs made some investment in 2007 into fixed assets (machinery, vehicles, equipment, land and/ or buildings). The number of SMEs making investments continues to decline steeply, from 40% of businesses in 2002 to 27% in 2005 to just 15% in 2007. This negative trend is troubling, given that business confidence rose in 2007 as well as access to loans for individual entrepreneurs and dehkan farms.29 Given these two factors, one would expect investments in fixed assets to rise. The decline in fixed asset investments, combined with generally increased access to finance, indicates that most SMEs are using loans to finance ongoing operations or for purposes other than making long-term investments in business growth. It also indicates that regulatory and other obstacles to investment remain, such as limited confidence of SMEs in the strength of property rights in Tajikistan. Continued government attention to implementation of investment climate reforms is essential, in order to reverse this trend. 30 Chart 5.24 – Investments continue to fall across the SME sector Percentage of respondents who invested in fixed assets30

38

42 72

62

58 28 2002

2005

53

60

85

47

40

15 2007

Individual entrepreneurs Not invested

2002

2005

2007

Small and medium companies

73

27 2002

83

90

17

10

2005

2007

Dehkan farms

Invested

29

See Chapter 1.

30

Small and medium company data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

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5

SMEs allocated about 90% of the value of these fixed asset investments into machinery, vehicles and equipment, and they invested the remaining 10% in land and buildings. Chart 5.25 shows the allocations made by individual entrepreneurs, dehkan farms, and small and medium companies. The low percentage of investments in immovable assets (land and buildings) may result from the generally insecure and unenforceable land rights in Tajikistan.31 32 Chart 5.25 – Among those SMEs who invest in their business, 90% of that money goes into machinery, vehicles and equipment Amount spent on purchases of fixed assets in, in somoni32

76,000

22,000

Machinery,vehicles and equpment Land and building

4,500

21,000

1,500

500

Individual entrepreneurs

Small and medium companies

Dehkan farms

Another likely reason for the low levels of investment in land and buildings is the difficulty of obtaining long-term financing. Individual entrepreneurs and dehkan farms make 75% or more of their fixed asset purchases without bank loans. More than half of small and medium companies’ fixed asset purchases are financed by their own funds or retained earnings. Thus, SMEs may find it easier to purchase fixed assets in small increments (one piece of equipment at a time) with cash than to make a major investment (such as additional land) with financing. 33 Chart 5.26 – Bank loans are underutilized across the SME sector for fixed asset investments Funding source for investments into fixed assets, as percentage of investment value33

Small and medium companies

Individual entrepreneurs 10%

4%

27%

Dehkan farms 8%

18%

0.2%

13%

32%

7%

15%

6% 21%

23%

60%

Internal funds or retained earnings Other Owner’s contributions

132

6%

22%

3%

25%

Borrowed from private banks Borrowed from state owned banks Purchased on credit from suppliers and/or advance from customers

31

See for example: 2008 Country Report on Human Rights Practices in Tajikistan, U.S. Department of State.

32

Small and medium company data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

33

Small and medium company data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Data from the World Bank Enterprise Surveys indicate that Tajikistan has virtually the lowest percentage of firms who use bank financing for investment in all of Eastern Europe and Central Asia (ECA). Only in Uzbekistan are companies less likely to go to banks to finance their investment. 34

Chart 5.27 - Tajik companies finance less than 10% of their investments with bank loans Bank finance for investments, as percentage of investment value 34 45% 40% 35% 30% 25%

ECA Regional Average

20% 15% 10% 5% Turkey

Montenegro

Slovenia

Croatia

Hungary

Lithuania

Macedonia, FYR

Serbia

Bulgaria

Latvia

Georgia

Bosnia and Hercegovina

Poland

Estonia

Romania

Armenia

Moldova

Belarus

Slovakia

Ukraine

Kazakhstan

Albania

Czech Republic

Kyrgyz Republic

Azerbaijan

Russia

Kosovo

Tajikistan

Uzbekistan

0%

Women and finance Women’s access to credit is not constrained by Tajik laws regulating land, property rights or credit, and indeed, survey data indicate that women generally use credit and obtain approval for credit applications more than men. However, female dehkan farmers report reduced access to banking services, relative to male dehkan farmers. Collateral may be a key problem for these women, since most certificates of ownership for property are in male names only.35 Also, dehkan farms whose top manager is a woman are more likely to be micro-size businesses (fewer than 5 employees) than are those managed by a man. Survey data demonstrate that female individual entrepreneurs have better access to finance than their male counterparts do, by about 9 percentage points (see chart 5.28), perhaps due to efforts of microfinance organizations to locate and support female borrowers. One hundred percent of female individual entrepreneurs who applied for loans report their applications were approved, except for women in Sughd region, where the figure was 91%.

34

All data refer to companies with more than 5 employees (Source: Enterprise Surveys).

35

“Understanding Household Level Barriers Constraining Women’s Access to Land and Financial Resources in Tajikistan” and “A Gender Perspective on Land and Finance in Tajikistan: Evidence from the Living Standards Measurement Study 2007.” World Bank. Forthcoming.

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5

Chart 5.28 - Among individual entrepreneurs, women have better access to bank loans36 % of respondents 97 88

67

Male

40

58

Female

32

Did your company need external funding?

If yes... did you apply for a loan?

If yes... did you get a loan?

Despite their better access to loans, female individual entrepreneurs are more likely to identify access to finance as an obstacle for their business (see chart 5.31). As shown in the Chapter 1, 36% of individual entrepreneurs are women. Enterprise Survey data indicate that Tajik companies run by women more actively seek credit than do those run by men. Sixty percent of companies whose top manager was a woman applied for a loan in 2007, compared to only 34% of male-run businesses (chart 5.29). Women’s approval rate was lower than men’s by two percentage points. Chart 5.29 - Access to loans for companies, by gender of top manager % of companies who replied yes, by gender of top manager 88 86 60 Male Female

34

Did your apply for a loan in 2007?

36

134

If yes...did you get the loan?

Respondents were given several possible sources for the loan or line of credit, including private banks, the state-owned bank, microfinance organizations, credit cooperatives, credit unions or finance companies.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Only 9% of dehkan farms have a female top manager. These women are much more likely to have their loan applications turned down (see chart 5.30). Not surprisingly, female dehkan farmers are the most likely to cite access to finance as a major or severe obstacle in the operations of their business (chart 5.31). Chart 5.30 - Among dehkan farms, women are more likely to be turned down for bank loans % of respondents, who replied yes, by gender of top manager 70 55

55

Male

53

49

Female

29

Did your company need external funding?

If yes... did you apply for a loan?

If yes... did you get a loan?

Chart 5.31 - Share of firms who say access to finance is an obstacle, by gender of top manager37 % of respondents 44 31 21

25 16

Individual entrepreneurs Female

24

Small and medium companies

Dehkan farms

Male

According to the Association of Microfinance Organizations of Tajikistan, more than 62% of clients of microfinance organizations are women. Data from one of the largest microfinance organizations show that the majority of its active female clients are between 31 and 50 years old, with some education beyond the high school level.38 37

Chart reports data for firms who describe access to finance as a “major” or “very severe” obstacle; the other choices were “no obstacle,” “minor obstacle,” or “moderate obstacle.” Small and medium company data refers to companies with between 5 and 200 employees (Source: Enterprise Surveys).

38

“Understanding Household Level Barriers” and “A Gender Perspective.” World Bank. Forthcoming.

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5

World Bank research indicates that even in rural areas, most women take out loans for their trading business, rather than for agricultural production. Relative to men, they are more likely to borrow to support business activities and livestock holdings and less likely to borrow for consumption or investment purposes.39

5.3 - Suggested directions for reform: Credit bureau and expanded leasing Leasing holds great potential as a source of finance for Tajik SMEs, as well as larger firms. After years of almost no growth, the volume of lease deals in Tajikistan quadrupled in value from 2007 to 2008 and reached almost $25 million by year end. There are now eight active lessors in Tajikistan, including five leasing companies, two banks, and one microfinance leasing company. Leasing is especially useful for Tajik businesses that have yet to build up a credit history, because it enables the financing of equipment using the equipment itself as collateral. Dehkan farms in particular could benefit from the introduction of leasing. An overwhelming part of the existing farm equipment is outdated, and new machinery is beyond the financial reach of most farms. Two obstacles to further development of the leasing sector are the lack of long-term funding sources for leasing companies, and the requirement that lessors pay VAT on leased goods. Amendments to the Tax Code were presented to President Rahmon in December 2008; these amendments remove the VAT obstacle, enabling lessors to become competitive with traditional credit instruments. Tajikistan has taken the first steps toward the development of a credit bureau, by passing a Law on Credit Histories in March 2009. The legislation allows for the development of a private credit bureau, supervised by the National Bank of Tajikistan. The credit bureau would collect information about the creditworthiness of individuals, based on both positive and negative experiences of banks, and others such as utilities or mobile phone operators. The absence of borrower information makes it harder for banks to adequately price and manage credit risk, and the credit bureau has universal appeal among the Tajik financial sector. Success of the credit bureau will depend, however, on Tajik financial institutions’ ability to overcome traditional reluctance to sharing information among themselves. A credit bureau is not a “quick fix.” It takes a few years for new credit bureaus to build up information from banks about individual lenders and make it available. 39

136

“Understanding Household Level Barriers” and “A Gender Perspective.” World Bank. Forthcoming.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Access to Finance


Access to Finance

Recommendations 1. Implement the recommendations of the Financial Sector Assessment Program. 2. Encourage private investors to develop a private credit bureau. 3. T rain lawyers and judges on collateral requirements and on their role in the enforcement of loan and lease agreements. It is essential that lenders have confidence in the legal system’s ability to enforce loan and lease agreements, otherwise improvements in collateral registries may not translate into increased lending. 4. U nusually, the National Bank of Tajikistan must give its approval every time a microfinance organization (or bank) accepts money from foreign sources. Coupled with controls on foreign exchange, this requirement makes it more difficult for MFOs to stay suitably capitalized. MFOs should be required to notify the NBT when they receive additional funds within a specified time limit, but approval from NBT should not be required. 5. I mprove the legal framework governing the pledge of land use certificates to enable better their use as collateral. Publicize the property registry at the Ministry of Justice among lenders and potential borrowers.

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Chapter 6 - Inspections


Chapter 6

Chapter 6 - INSPECTIONS Key Survey Findings --

The 2006 Inspections Law and its implementation resulted in annual savings to the Tajik SME sector of $9.3 million, reflecting savings to individual entrepreneurs and dehkan farms offset by an increase in costs to small and medium companies.

--

More than one in three small and medium companies, and half of dehkan farms, did not undergo any inspections in 2007. The situation for individual entrepreneurs also improved, although still 87% of individual entrepreneurs were inspected.

--

The average dehkan farm was inspected just twice in 2007, compared to 10 times in 2002. Small and medium companies underwent 5 inspections each in 2007, less than half of what they experienced in 2005. Individual entrepreneurs underwent an average of 10 inspections in 2007, an improvement from prior years but still high

--

In 2007, the average small and medium company spent over 2,500 TJS (about $700) on inspections, more than double what they spent in 2005.

--

Individual entrepreneurs spent 91 TJS ($26) and dehkan farms spent 12 TJS ($3.50) on all inspections in 2007, including unofficial costs.

--

In 2007, regulatory inspections were conducted most frequently by tax authorities, the Sanitary Epidemiological Service, or the Fire Agency.

--

Inspection checklists were introduced with the 2006 Inspections Law. 48% of inspected individual entrepreneurs and dehkan farms, and 60% of small and medium companies, were inspected with a checklist in 2007.

--

Advance notification of inspections, another innovation of the 2006 Inspections Law, was sent at least once to 14% of individual entrepreneurs, 34% of dehkan farms, and 52% of small and medium companies, in 2007.

Survey results indicate that inspections are much less of a barrier to individual entrepreneurs in 2007, as compared to 2002 or 2005. This improvement is even more remarkable for dehkan farms, who receivd an average of just 2 inspections in 2007. However, inspections remain a heavy burden for small and medium companies, due to the increase in cost of an inspection from 2005 to 2007. Survey results demonstrate evidence of compliance with the 2006 Inspections Law.1 According to the Inspections Law, inspections bodies are required to develop and use checklists during inspections. In 2007, about 52% of SMEs who underwent inspections were inspected with a checklist at least once. The Law also requires the inspections bodies to provide entrepreneurs with advance notice three days before an inspection is to take place.2 Labor and Social Protection, one of the inspectorates which performed best on this indicator, sent advance notice to 39% of the small and medium companies it inspected and over half of the dehkan farms it inspected.

140

1

Law “About Inspections of activity of managing subjects in Republic Tajikistan” №194, from 28.07.2006.

2

In this chapter, the terms “inspectorate” and “inspections body” are used interchangeably to refer to any government agency which conducts inspections.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Inspections


INSPECTIONS

Other results show that inspections have become less burdensome. Significantly fewer businesses were subjected to inspections in 2007 than in 2005. The number of inspections per business in 2007 is only half the 2005 level. The share of SMEs who reported making unofficial payments or giving gifts to inspectors in 2007 fell dramatically from 2005. Despite these significant changes, there remains room and need for further improvement. About 17% of small and medium companies’ profits went to inspections bodies in 2007. The average individual entrepreneur was inspected 10 times in 2007. There is also evidence that implementation of the Inspections Law is still limited. While the law prohibits inspections of businesses within the first 3 years of operation, over half of SMEs registered in 2006 or 2007 were inspected in 2007. Many inspectorates have not begun using checklists in practice or sending advance notice to businesses. No inspectorate has introduced risk-based inspections, even though the Law requires that they develop and use risk categories when deciding which businesses to inspect. Introduction of risk-based assessment when deciding which entities to inspect will allow inspections bodies to focus on businesses with the greatest probable risk to health and safety. Risk-based assessments will result in better allocation of limited government resources, as well as reducing the burden to entrepreneurs of unnecessary inspections. Effective procedures related to inspections also depend on the complementary components of the government’s regulatory system, such as rules for permits, licenses, and taxation.

6.1 - CONTEXT: INSPECTIONS Inspections are essential components of the regulatory system, ensuring that business activities are conducted in compliance with regulations aimed at protecting the health and safety of the citizens, their consumer rights, the safety of the state, and the environment. Nevertheless, it is essential that the state balance this control with efficient use of economic resources. The government of Tajikistan took the first step toward inspections reform in 2001 by introducing the Inspections Registration Book.3 The main goal of Inspections Registration Book introduction was to reduce the widespread practice of unofficial inspections. The Inspections Registration Book is a logbook where the entrepreneur and inspector record details of each inspection, including information about the inspector and the findings of the inspection. 3

Decree of President Republic of Tajikistan “About introduction Inspections Registration Book”, №542, from 28.02.2001.

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Chapter 6

In 2006, the government of Tajikistan radically reformed inspections by providing a unified regulatory framework for inspections for the first time. Inspections in Tajikistan are now regulated by the Inspections Law4 signed on July 28, 2006. Before this law, instructions governing business inspections were scattered among different regulations governing individual sectors, or in many cases, not formalized at all. IFC analysis shows that implementation of the Inspections Law resulted in annual savings to the SME sector of $9.3 million (see attachment 6.1). On July 25, 2008, President Emomali Rahmon announced a twoyear moratorium on conducting any kind of inspection of SMEs,5 in effect until July 29, 2010. However, further instructions were not provided to government ministries and agencies until March 26, 2009, with adoption of the Law on Moratorium №505. Unfortunately the exceptions have not been defined in such a way as to make the moratorium most effective. This two-year period of the moratorium should be utilized to achieve full implementation of the Inspection Law and to create a transparent and effective monitoring system of inspectorates’ work. The moratorium also provides a good opportunity for development of public education programs to reduce the number of regulatory violations, as well as an opportunity to train inspectors on the new rules. Finally, inspectorates can use the moratorium period to modernize their regulations, norms, and processes, including the introduction of a risk management system.

Requirements of the 2006 Inspections Law The Inspections Law applies to all government bodies authorized to carry out inspections of businesses, except the tax authorities. The Tax Code6 regulates inspections carried out by tax authorities. The new legislative framework is designed to reduce the discretion of inspection officials, clarify the technical requirements for businesses, create an orderly process that clearly defines the rights and protections of inspected businesses, and increase transparency in the inspections process. Box 6.1 describes key features of the law. The underlying principles of the law include: •

142

Risk management: Enterprises should be selected for inspections after an assessment of the risk that their economic activity poses to public safety, and low risk businesses should be inspected only rarely. (See section 6.3 for an explanation of risk management in inspections.)

4

№194 from 28.07.2006.

5

The reference period for this survey, calendar year 2007, was before the moratorium period.

6

Decree of President Republic of Tajikistan “About introduction Inspections Registration Book”, №542, from 28.02.2001.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Inspections


INSPECTIONS

Division of responsibilities: Inspection results (identifications of violations) and the related fine amount are determined by different individuals than the ones conducting the inspection. This also means that fines are not collected on the spot.

Transparency and compliance: Entrepreneurs are better able to comply with the rules when they have a full understanding of the regulations and of their own duties and responsibilities. Inspectorates can support this process by publishing more information about inspections and by adopting checklists.

There are 23 inspections bodies in Tajikistan, all of which are subject to the provisions of the Inspections Law (see attachment 6.2 for list of all inspectorates). In addition, the Tax Committee conducts tax inspections according to the Tax Сode as amended in July 2006, under the same principles contained in the Inspections Law.7 While the Inspections Law was adopted in July 2006, the inspecting agencies were given until December 2008 to comply fully with its provisions. Much of the implementation work involves reviewing, updating and codifying a large stock of outdated and often obsolete technical norms and regulations inherited from the Soviet Union. The law requires inspectorates to develop an inspections manual for staff outlining the procedural guidelines, a system to identify highrisk businesses and plan inspections accordingly, a series of checklists to clarify the technical requirements against which businesses should be inspected, and forms required for use in the inspections process (such as advance notification, inspection decision). See box 6.3 for an example of the implementation work conducted by the Fire Agency, the Sanitary and Epidemiological Service (SES), and the Tax Committee. From the entrepreneurs’ perspective, the introduction of checklists is perhaps the most visible difference resulting from the 2006 Inspections Law. Checklists make it much easier for businesses to understand and comply with their legal obligations for the protection of public health and safety. Checklists help inspectors, too, by allowing them to complete inspections more quickly and effectively. See Attachment 6.2 for a list of all checklists registered at the Ministry of Justice as of July 1, 2009. The law requires inspectorates to have checklists that specify the technical requirements for the most frequent types of inspections they conduct. While all 23 inspectorates have developed and registered at least one checklist, there is room for further improvement on this aspect of Inspections Law implementation. Once checklists are developed, inspectorates often require additional resources to print and distribute checklists to inspectors and businesses. 7

See Chapter 4 of the Tax Code and Law “About Modification and Additions in the Tax Code of Republic Tajikistan”, №193 from 28.07.2006

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Chapter 6

Box 6.1 - Key features of the 2006 Law on Inspections Frequency of inspections •

Not more than once in 2 years (in specific high risk cases not more than once in 6 months);

New SMEs are not subject to inspections for the first 3 years of their work.

Duration of inspections •

Financial audits should be less than 20 calendar days for legal entities and less than 10 calendar days for individual entrepreneurs.

All other inspections of individual entrepreneurs and legal entities should be less than five business days.

Steps in the inspections process •

Inspectorate grants inspector authorization to conduct an inspection;

Inspector sends notification to business at least 3 days before the scheduled inspection;

Inspector conducts inspection on appointed date, using the appropriate checklist, and makes an entry in the Inspections Registration Book;

Head/line manager of the inspectorate determines amount of any fines required, based on written report of inspector;

Inspector gives the business a written report detailing the results of the inspection (including any fines due) and the appeals process, within five business days.

Restrictions on inspectors •

Inspectors may not interfere with business operations that are unrelated to the subject of the inspection;

Inspectors may not charge cash fees, including penalties;

Inspectors may not undertake actions which impede the continuous production or commercial operations of businesses.

Increased transparency •

Inspections bodies must make normative documents accessible to the public.

Each inspection body must publish an annual report, with short summary of inspections, findings and the plans and priorities for the next year.

Some of the checklists which have been developed are not very clear and/or contain outdated and unnecessary requirements. Each checklist should list the normative acts that form the basis for the questions asked. Sometimes the questions on the checklists are inappropriate, because they are overly general, or they refer to other normative legal acts, or they are beyond the jurisdiction of the particular inspection body. Finally, each checklist should contain space for the inspector to write “yes” or “no” and space for inspector comments. In this way, the checklist becomes an important record of the inspection and the sole basis for any fines charged. The State Committee on Investments and State Property Management is responsible for monitoring compliance of inspections agencies with the 2006 Inspections Law, and its staff have been trained on the development of high-quality checklists (see box 6.3).

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Box 6.2 - What is an inspections checklist and how is it helpful? An Inspection Checklist is a legal document developed by an inspectorate to be used by inspectors during their regular inspections of businesses. The checklists contain all questions the inspector will use to determine the business’s level of compliance with relevant norms and rules. Inspection checklists are used routinely in a variety of countries, including France, Germany, the United Kingdom, Latvia, Mexico, and Uzbekistan. Checklists benefit the government and private sector, by: •

Reducing the time required to carry out an inspection

Making it easier for inspectorates to train staff on inspecting different types of businesses

Reducing variations between inspectors and inspections

Increasing transparency in the inspections process

Raising awareness of entrepreneurs on the rules they must follow in their operations

Producing a clear record of infringements found during the inspection

Another aspect of compliance demonstrated by inspectorates is their development of Inspection Manuals. These manuals describe the process of the inspection step by step, as it is prescribed in the Inspections Law, and serve as a handbook for the inspectors of that particular inspection agency. Each inspectorate has developed and registered a manual with the Ministry of Justice. Beyond checklist and manual development, other work remains to be done to achieve full implementation of the 2006 Inspections Law. No inspectorates have developed a risk-based inspection system, a key aspect of the law. (See section 6.3 for more information on risk-based inspections.)

Inspections moratorium In July 2008, President Rahmon signed a Government Degree introducing a two-year Moratorium on inspections for small and medium businesses, and in March 2009 Parliament adopted a Law on Moratorium.8 The moratorium prohibits inspections of small and medium businesses in Tajikistan until July 29, 2010. The stated goal of the moratorium on inspections is elimination of excessive intervention in activity of subjects of business and an improved environment for SME growth. The March 2009 law introduced a number of exceptions. The following are permitted during the moratorium period: --

inspections based on consumer complaints

--

SES and pharmaceutical inspections

--

inspections of high risk objects

8

№496 from July 25, 2008 and №505 from March 26, 2009.

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Box 6.3 - Facilitating implementation of the 2006 Inspections Law The 2006 IFC SME Survey report found that inspections by the tax authorities, the Fire Agency, and the Sanitary and Epidemiological Service (SES) accounted for 70% of the inspections faced by one entrepreneur. With financial support from the Swiss government, IFC was able to work intensively with these agencies, particularly the Fire Agency and SES, on inspections law implementation. IFC also formed a committee of all inspectorates that met regularly to share information on implementation of inspections law requirements. Work performed under IFC’s partnerships with these three key inspectorates shows the significant preparatory efforts required on the part of each inspectorate to comply fully with the 2006 Inspections Law. Actions taken to implement the Inspections Law at the Fire Agency, the Sanitary Service, and to implement inspections-related changes to the Tax Code at the Tax Committee, include: •

The agencies and IFC jointly developed and tested 19 checklists, such as fire inspections of catering businesses or sanitary inspections of medical laboratories, and an inspections manual for each agency.

IFC printed 800 copies of inspection manuals, 27,500 copies of the checklists, and 120,000 copies of other forms for use in the inspections process.

The agencies distributed the manuals, checklists and forms above to officials in all of Tajikistan’s 57 districts.

IFC and agency staff trained all 264 fire inspectors, all 406 sanitary inspectors, and 27 Tax Committee inspectortrainers on the new inspections procedures.

IFC led a study tour for 8 senior members of the Fire Agency to London to learn about the British system of risk-based inspections.

The State Committee for Investments and State Property Management is the government body responsible for ensuring compliance by all inspectorates with provisions of the law. They have taken an active role in the inspections committee described above and continue to monitor inspectorates’ compliance with the law. Full implementation of the Inspections Law also requires awareness among entrepreneurs of the Law and how it affects them. Other IFC activities to support compliance included: •

preparation of a manual on the development and introduction of checklists, and training for inspectorates on its use;

training for officials at the State Committee for Investments and State Property Management on how to ensure the quality and usefulness of checklists developed by inspectorates;

development, printing and distribution of 10,000 copies of a user-friendly brochure on the Inspections Law for entrepreneurs;

creation of a training network (with partners like UNDP, OSCE, MSDSP, ACTED, Center of Entrepreneurship Support in Dushanbe, Tojprombank, Eskhata bank, and the Sugd Business Association) which delivered half-day trainings to 3,600 entrepreneurs on their rights and responsibilities during the inspections process; and

development of 4 public-service announcements about the key features of the Inspections Law, which the state television station agreed to broadcast free of charge over a period of 4 months.

--

inspections based on taxpayer complaints

--

documentary tax inspections based on request from law-enforcement structures relating to a criminal investigation

Unfortunately, some of these exceptions are vague and undermine the effectiveness of the moratorium. For example, it is not clear how a consumer or taxpayer application for an inspection would work. Also, no inspectorates have yet complied with the Inspections Law requirement for developing a system to assess risk. In this absence, the definition of “high risk objects” is left open to interpretation.

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Additionally, the March 2009 law introduced the concept of a preventive visit by inspectors. The “preventive visit” gives inspectors the right to review a business’s compliance with legislation. If the inspector finds any weaknesses, he can give recommendations to the entrepreneur for remedying them. Preventive visits must be registered in the Inspections Registration Book, and they can occur with the same frequency as regular inspections per the Inspections Law. Inspectorates are prohibited from assessing fees based on preventive visits. Unfortunately, preventive visits do create a space for unofficial payments, since many small business owners may not be aware of the full provisions of the inspections moratorium. Also, there are no instructions for inspectors on how to address any regulatory violations that present severe risks to public health and safety. Inspectors can shut down a business to guard against the “threat of life and safety of citizens,” but there are no additional guidelines on what this means. The eight month delay between announcement of the moratorium and the clarification of its terms by implementing legislation has limited the effectiveness of the moratorium at reducing inspections. Anecdotal evidence from Tajik businesses suggests that significant numbers of inspections continue to take place, despite extensive coverage of the President’s July 2008 announcement of moratorium in the media. The announcement of a moratorium on inspections of small and medium businesses has become a popular tool to reduce the number of inspections in formerly Soviet countries (see box 6.4). Their effectiveness as a policy tool is yet to be determined. For Tajikistan, the moratorium will be a successful policy decision if inspectorates use this time to bring themselves into full compliance with the 2006 Inspections Law.

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Box 6.4 - Inspections moratoria in other countries ARMENIA Period: June 1, 2009 to January 1, 2011 Moratorium prohibits: inspections of SMEs, defined as companies with annual turnover below 70 million Armenian Dram (approximately $181,000) Exceptions: tax inspections; inspections carried out pursuant to the requirement of criminal procedures; inspections upon the written approval of the Prime Minister, for the purposes of protection of rights, life and health of the individuals, as well as for the purpose of national defense and security (based on valid justification); inspections upon the written request of company director; and inspections in cases of SME liquidation. Stated reason: to insure continuing economic reforms, increase effectiveness of inspections during the reform period, overcome current economic challenges, and protect SME economic interests. KAZAKHSTAN Period: February 21, 2008 to December 31, 2008; then extended for February 17, 2009 to July 1, 2009 Moratorium prohibits: inspections of SMEs. Exceptions: certain kinds of tax inspections; inspections related to criminal affairs; sanitary inspections; veterinary inspections; mineral resource inspections; inspections related to granting land around Astana and cities of regional status. Stated reason: elimination of excessive intervention in business activity in the context of an economic crisis. KYRGYZSTAN Period: April, 22, 2008 to December 31, 2008 Moratorium prohibits tax inspections of all type of business. Also the moratorium reduces other inspections by 70%. Exceptions: inspections at the request of the taxpayer; inspections at the request of tax agencies from other countries. Stated reason: elimination of excessive intervention in business activity, creation of improved conditions for investment. BELARUS Period: January 1, 2009 to July 1, 2009 Moratorium prohibits: inspection of economic entities. Exceptions: inspections on criminal cases; inspections of dangerous industrial objects; sanitary inspections; construction supervision inspections, but not earlier than 12 months from the last inspection; inspections by the national bank. Stated reason: suspension of inspections in anticipation of legislation introducing a new, uniform, streamlined system of inspections. RUSSIA - Moscow Period: February 10, 2009 to December 31, 2009 Moratorium prohibits: inspections of SMEs. Exceptions: inspections from Federal bodies; tax inspections; inspections on criminal cases. Stated reason: elimination of excessive intervention in business activity in the context of the economic crisis. RUSSIA - Chelyabinsk Period: March 1, 2009 to July 1, 2009 Moratorium prohibits: inspections of SMEs. Exceptions: inspections from Federal bodies; unscheduled inspections approved by the Public Prosecutor’s office. Stated reason: the economic crisis, and the planned entry into force on July 1 of the federal law regulating inspections of small businesses nationwide. UKRAINE Period: May 29, 2009 to December 31, 2010 Moratorium prohibits: inspections of economic entities. Exceptions: inspections of high risk entities (under Government Decisions); tax inspections; sanitary inspections; inspections at complaint of physical and legal bodies about infringement; upon written request by entity to be inspected. Stated reason: reduction in administrative barriers to business in the context of the economic crisis; creation of favorable conditions for business development.

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6.2 - KEY FINDINGS: INSPECTIONS ARE LESS OF A BURDEN IN 2007 THAN IN 2005 FOR MOST OF THE SME SECTOR Box 6.5 - Savings to the SME sector from inspections reform The 2006 Inspections Law and its implementation resulted in annual savings to the Tajik SME sector of over $9 million, reflecting savings to individual entrepreneurs and dehkan farms offset by an increase in costs to small and medium companies. Savings to individual entrepreneurs

$8,739,894

Savings to dehkan farms

+ 723,265

Increased cost to small and medium companies

-

Total savings to SME sector

$9,324,440

138,720

See Attachment 6.1 for an explanation of the analysis behind this calculation.

Significantly fewer businesses underwent inspections in 2007 than in 2005 or 2002. However, a majority of businesses continue to receive inspections from various government agencies. While implementation of the Inspections Law has reduced the burden of inspections for most SMEs, inspections still remain a problematic area for small and medium companies. More than one in three small and medium companies, and half of dehkan farms, did not undergo any inspections in 2007. The situation for individual entrepreneurs also improved, although still 87 % of individual entrepreneurs were inspected (see chart 6.1). If inspectorates begin to systematically assess the likely risk of different business types, then these figures will continue to fall and reach more manageable levels. Chart 6.1 - Fewer businesses inspected in 2007 % of respondents who were inspected at least once in the given year 99% 98% 87%

99% 96%

94%

88%

61% 50%

Individual entrepreneurs

Small and medium companies 2002

2005

Dehkan farms

2007

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The number of inspections conducted of each business has also improved. The average dehkan farm was inspected just twice in 2007, compared to 10 times in 2002. Small and medium companies underwent 5 inspections each in 2007, less than half of what they experienced in 2005. Individual entrepreneurs underwent an average of 10 inspections in 2007, an improvement from prior years but still high (see chart 6.2). An extensive public awareness campaign about inspections, combined with implementation efforts by inspectorates, have helped bring the number of inspections down to more manageable levels since 2002. Chart 6.2 - In 2007 number of inspections considerably reduced as compared with previous years but still high # of inspections per business, among all survey respondents 17 15

13

11

10

10 5

4

2 2002 Individual entrepreneurs

2005

2007

Small and medium companies

Dehkan farms

As the proliferation of inspections moratoria shows (see box 6.5), many former CIS countries are reforming inspections. Uzbekistan, for example, began inspections reform in 1998, and now significantly fewer Uzbek firms are inspected compared to those in Belarus, Tajikistan and Ukraine (see table 6.1). Tajikistan has come into line with these countries in terms of inspections per SME, although across the region these figures remain relatively high. Table 6.1 - Other country data9 Country

Azerbaijan

Belarus

Tajikistan

Ukraine

Uzbekistan

Share of SMEs inspected in a given year

70%

68%

61%

75%

20%

Number of inspections per inspected SME

4.8

6.3

5.1

5.6

5.1

2.1

3.5

5.1

18.6

10.2

Total duration per year (working days) per inspected SME

9

150

Source: IFC surveys in Belarus (2008), Uzbekistan (2008), Ukraine (2008). Working days for Tajikistan is calculated by IFC based on the reported number of inspections and the reported time per inspection, while the other data refer to direct survey questions. Data for all countries refer to legal entities or legal companies.

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Regulatory inspections related to taxation, sanitation, and fire safety are common In 2007 the top 5 inspectors of SMEs were the tax authorities, the Energy Surveillance agency, the Water Authority, the Sanitary Epidemiological Service, and the Fire Agency (see chart 6.3). Inspections by the energy and water authorities are payments related, while the others are true regulatory inspections. As part of Tajikistan’s continuing reforms in the energy sector, the government has begun to introduce stricter control over the consumption of water and electricity. These measures are necessary for the long-term sustainability of Tajikistan’s energy sector, although such inspections are viewed negatively by entrepreneurs. Chart 6.3 - In 2007, many inspections conducted by tax, energy and water authorities # of inspections per business, among those who received an inspection from the particular agency Individual entrepreneurs Tax Committee Energy Surveillance Water Authority Others agencies Sanitary& Epidemiological Service Fire TajikStandart Labor and social protection Agency for Checking Ecology Standards 0

1

2

3

4

5

2

3

4

5

Small and medium companies Energy Surveillance Water Authority Sanitary& Epidemiological Service Tax Committee Fire Others agencies Agency for Checking Ecology Standards TajikStandart Labor and social protection 0

1

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Dehkan farms Water Authority Sanitary& Epidemiological Service Tax Committee Energy Surveillance Others agencies Fire Labor and social protection Agency for Checking Ecology Standards TajikStandart 0

1

2

3

4

5

From 2005 to 2007, all inspectorates reduced the average number of times they inspect a given business (see chart 6.4). Improvements are most notable at the Tax Committee and the Sanitary and Epidemiological Service. SMEs report frequent visits from energy, tax and water authorities. Chart 6.4 - Number of inspections per agency decreased for most inspectorates from 2005 # of inspections per SME, among those who received an inspection from the particular agency 6.0 2005

4.8

4.6 3.8

2.7

3.2

2.9

2.0

152

TajikStandart

Fire authority

Sanitary Epidemiological Service

Water authority

Tax authorities

Energy Surveillance

2.0

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Inspections

2.0

2.1 1.6

1.4

Labor and Social Protection

3.3 3.1

Agency for Checking Ecology Standards

3.9

2007


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Inspections are now shorter and less costly for individual entrepreneurs and dehkan farms The average time required to complete an inspection fell significantly from 2005 to 2007. Small and medium companies spent 6 hours less per inspection in 2007 than in 2005. Inspections of individual entrepreneurs are also shorter, and they remain much faster than inspections of small and medium companies. Time improvements from 2005 likely stem not only from increased efficiency of the inspections, but may also result from improved interaction between the entrepreneurs and the inspector as a result of checklists and other provisions of the Inspections Law. Chart 6.5 - The time for an inspection of an individual entrepreneur has fallen in half10 average # working hours for one inspection 2005

2007

14 8

5

2

Individual entrepreneurs

Small and medium companies

The combination of fewer inspections per business and shorter inspections means that businesses spend less time overall dealing with inspections. They are able to devote more time to the operation of their businesses instead. While small and medium companies still spend about 3 weeks dealing with inspectors, individual entrepreneurs and dehkan farms now devote just a few days annually to inspections procedures. Chart 6.6 - In 2007, small and medium companies still spent more than 3 calendar weeks for all inspections # of working days spent by firms for all inspections in 2007, based on total # of inspections and average duration of an inspection11 2002 19

17

6

20

2005 2007

15 7

3

Individual entrepreneurs

3

Small and medium companies

2

Dehkan farms

10

This question was not asked of dehkan farms.

11

For small and medium companies: 2007 data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys). 2002 and 2005 data refer to companies with up to 200 employees.

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The purpose of many inspections, such as sanitary and fire inspections, is to verify a business’s compliance with technical norms and standards as contained in the law. Inspectors from the water and energy authorities visit businesses to determine how much water and energy these firms are using. These types of inspections frequently last just a few hours (see chart 6.7). Tax inspections involve the analysis of financial documentation of economic activity. This can be a difficult and time consuming exercise. In 2007, the average tax inspection of a small and medium company lasted almost 3 working days. Chart 6.7 - Businesses describe the average duration of inspections from the following inspectorates in 2007 # of working hours

7.5

Tax authorities

21.2 4.1 2.8

Sanitary Epidemiological Service

3.7 2.8 4.6

Energy Surveilance

3.2 2.7

Dehkan farms Small and medium companies

3.9

Fire Authority

Individual entrepreneurs

2.9 2.1 8.1

Water Authority

2.7 2.3

The monetary expenses connected with inspections, including official and informal payments, can be substantial. In 2007, the average small and medium company spent over 2,500 TJS (about $720) on all inspections, equivalent to 375 somoni per inspection. This is a major increase from 2005, and represents about 17% of the average profits of a small and medium company. In the meantime, individual entrepreneurs and dehkan farms spent significantly less on inspections in 2007 than in 2005.

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Chart 6.8 - Small and medium companies spend significantly more money on the average inspection Cost in somoni of one inspection, including official and unofficial costs12

375

2005 2007

100 29

24

14

Individual entrepreneurs

Small and medium companies

5

Dehkan farms

Chart 6.9 - Inspections expenses are equivalent to 17% of small and medium company profits in 2007

2,536 17%

91 Small and medium companies

# of inspections

5

1%

Individual entrepreneurs

10

12 0% Dehkan farmers

2

How much did all the inspections cost, including official fines and any unofficial payments (TJS) Cost for all inspections, as % of profit

Regional variation in the cost and frequency of inspections The number of inspections per SME has fallen in all regions of Tajikistan, with some regions showing considerable improvement. The average SME in Dushanbe was inspected 23 times in 2005, but only

12

For small and medium companies: 2007 data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys). 2005 data refer to companies with up to 200 employees. Also, data for 2005 and 2007 are calculated slightly differently. In 2005, respondents were asked about the cost of one inspection, while in 2007, they were asked the total cost of all inspections. For this chart, IFC divided the cost of all inspections by the number of reported inspections per affected business. For both 2005 and 2007, the calculation includes zero values (in which businesses who had been inspected said they had 0 cost of those inspections).

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7 times in 2007. The average SME in DRS B received 9 fewer inspections, and in Kulyab 8 fewer inspections, in 2007 than in 2005. In the lightly populated GBAO region, however, the number of inspections has improved only slightly, from 20 to 16. Chart 6.10 - Dramatic drop in inspections in Dushanbe from 2005 to 2007 # of inspections per SME 20

2005

23

2007

16 10

7

GBAO

Dushanbe

8

6

KurganTube

11

11 5

5

Sughd

DRS A

11 3

Kulyab

2 DRS B

The cost of all inspections to the average SME also differs, depending on the region in which the SME operates. Charts 6.11-6.13 present the cost of all inspections to the average SME, whether or not the business was inspected. They also present this information as a percentage of the average business’s annual turnover. The regional cost analysis also demonstrates a favorable picture in Dushanbe, both for individual entrepreneurs and small and medium companies. IFC calculation of responses indicates that in most regions, the average business spends less than 1% of annual turnover on all inspections. However, this figure jumps to about 3% for individual entrepreneurs in Kurgan-Tube and Sughd, and for small and medium companies in DRS A. Chart 6.11 - The average individual entrepreneur in Dushanbe spent little money on inspections in 2007 For the average individual entrepreneur, whether inspected or not, the cost of all inspections in somoni and as % of annual turnove 134 110 87

72

53

48 0.3 DRS B

0.3 Dushanbe

2.7 0.4

Kulyab

Cost of procedure, TJS

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Inspections

3.2

0.9 DRS A

Kurgan-Tube

Sughd

Cost of procedure as % of turnover


INSPECTIONS

Chart 6.12 - Among small and medium companies, those in DRS A spent the most money on inspections in 200713 For the average small and medium companies, whether inspected or not, the cost of all inspections in somoni and as % of annual turnover 5,001

2,051

1,587

1,214 0.7

0.6 Dushanbe

Kurgan-Tube

Cost of procedure, TJS

3.0

0.8 Sughd

DRS A

Cost of procedure as % of turnover

Chart 6.13 - Among dehkan farms, those in Kulyab spent the most money on inspections in 2007 For the average dehkan farm, whether inspected or not, the cost of all inspections in somoni and as % of annual turnover 50 32

0.0 DRS B

Dushanbe

Cost of procedure, TJS

19

12

10 2 0.0

0.1 Kulyab

0.8

0.2 DRS A

0.2

Kurgan-Tube

Sughd

Cost of procedure as % of turnover

Different degrees of compliance with new features of inspections law: checklists, advance notice, new businesses One of the key results of the 2006 Inspections Law was the introduction of checklists for usage during the inspection. Developing a high-quality checklist is a time-consuming process, because the underlying technical regulations are typically outdated and require revision. See box 6.6 for an example of the steps taken by the Sanitary and Epidemiological Service to create a checklist for inspections of retail trade facilities and food shops. Survey results indicate that 52% of SMEs in Tajikistan were inspected with a checklist in 2007. As checklist development did not begin until 2006, this indicates a rapid uptake by at least some inspectorates of the new inspections procedures. Small and medium companies, 13

Data refer to companies with between 5 and 200 employees (Source: Enterprise Surveys).

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in particular, now have experience with inspection checklists (chart 6.14). See Attachment 6.2 for a list of all checklists registered at the Ministry of Justice as of July 1, 2009. Chart 6.14 - Checklists frequently used during inspections of small and medium companies in 2007 % of respondents who were inspected with a checklist 60 48

Individual entrepreneurs

48

Small and medium companies

Dehkan farms

SMEs in Kulyab (the eastern part of Khatlon oblast) are most likely to report being inspected with a checklist in 2007 (see chart 6.15), a good result given that the average Kulyabi business received just 3 inspections in 2007. In Kurgan-Tube (the western part of Khatlon oblast), only 34% report an inspection with a checklist. Compliance in Dushanbe is about average, even though inspectors there should be most familiar with the new procedures. Chart 6.15 - Checklist usage varies by region Among respondents who were inspected in 2007, % of SMEs who were inspected with a checklist 80%

60% 50%

Kulyab

Sughd

Dushanbe

National average 52%

48%

DRS A

34%

33%

KurganTube

GBAO

30%

DRS B

A second requirement of the 2006 Inspections Law is that inspection bodies must send notification of an inspection to the entrepreneur at least 3 days in advance. As with inspection by checklist, the delivery of advance notice was not practiced before 2006. Individual entrepreneurs were the least likely to receive advance notice of an inspection in 2007 (see chart 6.16).

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Box 6.6 - Example of the development of a checklist How did the National Center of State Sanitary and Epidemiological Service under Ministry of Health (SES) implement an inspection check-list for retail trade facilities and food shops? Step 1: SES specialists developed the draft sanitary standards for retail trade facilities and food shops. Step 2: Based on the draft sanitary standards, SES experts prepared the check-list in cooperation with IFC project staff. Step 3: In cooperation with SES, IFC project staff conducted several focus groups on the draft check-list with entrepreneurs working in retail trade. Step 4: Based on focus group results, the draft check-list was reviewed and amended. Step 5: The amended check-list was tested during inspections of retail trade facilities and food shops. Step 6: After testing, final changes to the check-list were made, and the check-list was completed. Step 7: The check-list was submitted to the Ministry of Justice for legal expertise and registration. Step 8: The Ministry of Justice registered the check-list on inspections for retail trade facilities and food shops. Step 9: 7,500 copies of the check-list were printed (with the support of the IFC project) and disseminated among the regional SES departments. Step 10: The majority of SES inspectors were trained on new inspection rules and use of the check-list during inspections. Step 11: With cooperation of business associations, 1,000 copies of check-list were disseminated among entrepreneurs.

Chart 6.16 - Individual entrepreneurs least likely to receive advance notice Among respondents who received at least one inspection in 2007, % who received advance notice at least once

52% 34% 14%

Individual entrepreneurs

Small and medium companies

Dehkan farms

The Tax Committee and the Labor and Social Protection department in particular show good early performance (chart 6.17). Tax Committee inspectors also benefit from sending advanced notice, as it allows the business time to gather necessary documents used for calculation of their tax obligations. The Ministry of Labor and Social Protection was also among the first inspectorates to register an inspection checklist at the Ministry of Justice (see Appendix 6.1).

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Chart 6.17. Advance notice mostly sent by Tax Committee and Labor and Social Protection Among respondents who received an inspection from the particular agency, the % who received advance notice

Individual entrepreneurs

Small and medium companies

Labor and Social Protection

Tax authorities

Other agencies

Other agencies

Sanitary Epidemiological Service

Labor and Social Protection

Tax authorities

TajikStandart

Fire authority

Sanitary Epidemiological Service

TajikStandart

Water authority

Energy Suveillance

Agency for Checking Ecology Standards

Agency for Checking Ecology Standards

Fire authority

Water authority

Energy Suveillance

Dehkan farms Other agencies Labor and Social Protection Sanitary Epidemiological Service Fire authority Tax authorities Agency for Checking Ecology Standards TajikStandart Energy Suveillance Water authority

There are different levels of compliance with the advance notice requirement in different regional offices within the same inspectorate, most likely reflecting differing levels of training received by inspectors. For example, two out of three SMEs in Dushanbe received advance notice from the Labor and Social Protection Agency before the start of an inspection, while only 3% of those in GBAO did (chart 6.18). While this represents an extreme example, GBAO businesses are the least likely to receive advance notice from most inspectorates. GBAO’s very mountainous terrain, and associated difficulties in transportation and communication, may be one reason it lags behind in Inspections Law implementation.

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Chart 6.18 - Regional variation in the share of SMEs who received advance notice of an inspection from the Labor and Social Protection Agency Among respondents who received an inspection from the Labor and Social Protection Agency 66

48

44

29

28

3 Dushanbe

Kulyab

Kurgan-Tube

Sughd

DRS A

GBAO

When inspectorates do send advance notice, only the Tax Committee consistently meets the required length of 3 days before an inspection is to occur (see chart 6.19). However, these average figures for various inspections bodies do conceal important differences among their treatment of the various components of the SME sector. For example, the Tax Committee sent 4.2 days notice to the average small and medium company it inspected, 3.1 days notice to the average inspected dehkan farm, and just 1.8 days notice to the average individual entrepreneur it visited (in all cases, these figures are the average among those who received notice at all). Chart 6.19 - Tax Committee inspectors send notice furthest in advance Among respondents who received advance notice from an inspections body in 2007, average number of days notice reported by the average SME

1.9

1.9

1.9

Fire authority

Water authority

1.7

Sanitary Epidemiological Service

2.1

Agency for Checking Ecology Standards.

2.3

Labor and Social Protection

2.7

Energy Surveillance

TajikStandart

Tax authorities

2.8

Other

3.5

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A third provision of the 2006 Inspections Law is that businesses are not eligible for inspection during their first three years of activity. However, this part of the inspections reform has not shown the positive early results of checklists or advance notice. Many SMEs who registered in 2007 reported being inspected in 2007, against the provisions of the Inspections Law (chart 6.19). New businesses are less likely than other businesses to be inspected, but these numbers should be closer to zero. Chart 6.20 - 56% of new SMEs were inspected in 2007, in contradiction to the 2006 Inspections Law Among respondents who registered in 2007, % who received an inspection, and Among those new businesses who received an inspection, the average # of inspections per business 82%

SME sector average 56%

49%

40%

# of inspections per new business

Individual entrepreneurs

Small and medium companies

Dehkan farms

9

4

2

Small and medium companies managed by a woman spend less money on inspections Analysis of survey results by gender reveals different patterns for individual entrepreneurs and small and medium companies (chart 6.21). Female individual entrepreneurs receive more inspections than men do, although inspections of women are slightly shorter. For small and medium companies, those managed by men receive more inspections. Yet female-managed companies spent more total time dealing with inspections in 2007, because their average inspection was about 2.5 hours longer. The number of inspections per dehkan farm (1.9) is the same whether a woman or man was top manager.

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Chart 6.21 - Number of inspections in 2007, and hours per inspection, by gender of top manager 10.6

10.1

9.2

7.6 4.4

1.7 Female

5.2 1.9

1.9 Male

Individual entrepreneur

Female Male Small and medium company

1.9

Female

Male

Dehkan farm

Number of inspection in 2007 Hours per inspection in 2007

Small and medium companies managed by women spent less than half as much money on all inspections in 2007 as male-managed companies, even though their inspections were longer (chart 6.22). Chart 6.22 - Inspections are a greater financial burden on small and medium companies owned by men than women Total cost in somoni for all inspections in 2007, including fines and unofficial payments, for small and medium companies, by gender of top manager

4,436

1,845

Female

Male

Usage of the Inspections Registration Book results in reduced inspections The Inspections Registration Book is one tool to reduce the widespread practice of unofficial inspections and improve SME awareness of their rights. Introduced in 2001, it is a logbook where the entrepreneur and inspector record details of each inspection, including information about the inspector and the findings of the inspection. Usage of the Inspections Registration Book is a requirement for both inspectors and entrepreneurs in the 2006 Inspections Law. According to the survey, over 90% of small and medium companies report having the book (chart 6.23). Twice as many individual entrepreneurs have the Inspections Registration Book in 2007 as in 2005. However, still 44% of individual entrepreneurs do not have the book.

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Chart 6.23 - Share of respondents who report having an Inspections Registration Book14 91 2002

2005

2007

81

83

56

33

29

Individual entrepreneurs

Small and medium companies

Most inspectors are using the Inspections Registration Book, in accordance with requirements of the 2006 Inspections Law. Most SMEs say that inspectors “always” fill in the book (see chart 6.24). Chart 6.24 - Most inspectors register inspections in the Inspections Registration Book Among respondents who have the book 79%

Inspectors “always” fill in the IRB

60%

16%

Inspectors “sometimes” fill in the IRB

24% Small and medium companies

5%

Inspectors “never” fill in the IRB

15%

Individual entrepreneurs

Despite the requirements of the Inspections Law and a nationwide awareness campaign with participation of business associations, there are still many who do not know about the Inspections Registration Book. About a third of SMEs who do not have the book do not know about the book (chart 6.25). Unfortunately, there is no government agency designated to ensure that entrepreneurs receive the book.

14

164

2007 survey did not ask dehkan farms about the Inspections Registration Book

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Chart 6.25 - Many businesses are not aware of the Inspections Registration Book or not convinced of its benefits Among respondents who do not have the Inspections Registration Book 35%

Don’t think that the IRB will improve anything for their business

29% 13%

Don’t see any practical use from having the IRB

26% 21%

Don’t know where they can the IRB

7% 32%

Don’t know anything about the IRB

37%

Small and medium companies

Individual entrepreneurs

Improvement since 2005 in the frequency of unofficial payments The introduction of transparent inspection procedures, such as advance notice and checklists, the general reduction in the number of inspections, and increased use of the Inspections Registration Book have led to a drop in the reported frequency of unofficial solutions between inspectors and entrepreneurs. Survey results indicate that the prevalence of informality in the inspections process has fallen dramatically since 2005. In every region, fewer SMEs report making unofficial payments or giving gifts to inspectors in 2007 than in 2005. In Kurgan-Tube, Sughd and GBAO, the improvement is dramatic (see chart 6.26). Chart 6.26 - Since 2005, the frequency of unofficial payments has fallen across Tajikistan Among respondents who were inspected, % of SMEs who made unofficial payment or gave gift to inspector 96 76 63 47

41

35 19

Kulyab

Sughd

17

14

Kurgan-Tube

2005

31

DRS A

12

Dushanbe

10

GBAO

2007

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The regional comparison shows that the rate of unofficial solutions is improved but still quite high in Kulyab, where almost 41% of entrepreneurs prefer to solve problems informally. Despite considerable reduction in the number of entrepreneurs which preferred to solve problems by means of unofficial payments and gifts, as a whole this indicator is still high, in particular in Kulyab. Businesses are sometimes forced to cease operations as a result of an inspection – either because the inspector needs to spend time with the owner or because he finds violations that require immediate attention before operations can resume. The high rate of informal payments in Kulyab may be directly related to the short duration of business stoppage due to inspections (see chart 6.27). In Kulyab, entrepreneurs report only 1 day lost to inspections. Similarly, the lowest rate of unofficial payments is in GBAO, where businesses report being closed for the longest period of time. In GBAO, businesses lose more than 13 business days as a result of inspections. Chart 6.27 - In 2007 in Kulyab region only 1 day stoppage due to inspections Among those who experienced work stoppage due to inspections, # of working days of stoppage per SME 13.4

8.5

National average 5.9 4.5

4.3 3.3

1.0

Kulyab

Sughd

Kurgan-Tube

DRS A

Dushanbe

GBAO

In 2005, inspections were more likely to result in an unofficial payment to the inspector than in a fine. The situation has reversed in just 2 years. Inspections are now more likely to result in fines than in unofficial payments. This is true across all inspectorates (see chart 6.28).

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Chart 6.28 - Share of individual entrepreneurs who report paying a fine versus an unofficial payment during an inspection Among individual entrepreneurs who were inspected by the particular agency 31% 27%

18% 13% 10% 9%

Other

Fire authority

6%

Energy Suveillance

TajikStandart

Tax authorities

Sanitary Epidemiological Service

Fine

11%

Agency for Checking Ecology Standards

8%

8%

12% 11%

7% 4%

Labor and Social Protection

12%

Water authority

11%

15%

13%

Unofficial payment

Nationwide, less than 1 in 5 respondents report making an unofficial payment in the course of an inspection (see chart 6.29). Men are more likely to report using unofficial solutions than women are (chart 6.30). Chart 6.29 - Fewer SMEs made unofficial payments in 2007 than in 2005 % of respondents, among those who were inspected, who report making unofficial payments during inspections 33%

2007 2005

22% 17%

17% 10%

SME sector average

Individual entrepreneurs

Small and medium companies

Dehkan farms

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Chart 6.30 - Fewer female individual entrepreneurs report making unofficial payments than men, in 2007 Among those who were inspected, % of respondents who report making unofficial payments during inspections 19%

14%

Male

Female

Survey results may indicate that inspectors have transformed some of these unofficial payments into official fines, increasing the efficiency of inspections at assessing penalties for violations. While only 19% of inspected businesses paid a penalty in 2005, in 2007 28% report having paid a fine (see chart 6.31). Examination of rates of informal payments and official fines within the SME sector reveals differences by firm type (see chart 6.29 and 6.31). Dehkan farms are still more likely to report making unofficial payments than they are to pay a fine. While small and medium companies have the highest frequency of unofficial payments, individual entrepreneurs are the most likely to pay fines. Chart 6.31 - Inspectors are more likely to take official action in 2007 than in 200515 Among inspected businesses, those who paid a fine 39% 2007

29%

28%

2005

19%

7%

SME sector average

15

168

Individual entrepreneurs

Small and medium companies

Dehkan farms

The current survey asked businesses whether they paid a fine in 2007. The previous survey asked whether they paid a penalty or suffered another administrative action in 2005.

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6.3 - Directions for reform: Use Risk-Based Inspections to optimize government resources The incorporation of risk management for inspections began in the 1960s, as a tool to analyze possible threats in the nuclear and chemical industry. In the last two decades, risk management for planning of business inspections more generally has become a commonly used technique among the state inspecting bodies in Europe, Asia, and North America. The basic principle underlying risk management is that those activities that present the greatest risk of non-compliance should be subject to the greatest control, and those activities that present less risk should be subject to less control. Risk management in the inspections process, also known as riskbased inspections, has three key advantages: (1)

risk-based inspections allow inspectorates to more precisely and completely identify the potential threats for the entities which they are inspecting, and, hence, it allows inspectorates to prevent these threats and protect public health and safety; and

(2)

risk-based inspections allow inspectorates to allocate resources most efficiently, by focusing on those entities whose activities represent the greatest risk for people, environment, property or state.

(3)

risk-based inspections leaves more resources for awareness raising activities, enforcement etc.

The 2006 Inspections Law requires inspection bodies to develop a system of risk-based assessment and use it to determine which businesses to inspect. No inspectorates introduced a risk-based assessment system in 2007 or 2008. The absence of inspection decisions based on a risk assessment undermines the ability of inspections to protect public health and safety. It is also one of the main reasons why the average Tajik business undergoes so many inspections each year. Best-practice inspectorates introduce risk-based inspections during a three stage process. In the first stage, the inspectorates think systematically about the fundamental threats their agency is designed to prevent. What are the identifiable origins of these threats? What types of entities are most likely to have suitable conditions for the emergence of these threats? What are the specific items that inspectors should review during an inspection?

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This thought exercise can draw on many sources, such as inspectors’ own experience, records of public health and safety incidents, records of inspections performed by the inspectorate, and risk assessments undertaken in other countries. The threats, and their origins, identified in this exercise are then included in checklists for inspections. Inspectorates then classify entities into different groups, based on the different levels of risk they present. This risk classification includes the characteristics of entities in the different groups, and an adequate frequency for inspections of each group. For example, depending on the inspectorate, relevant characteristics might be: number of employees, square footage of building, sector of economic activity, primary customers of the business, proximity to environmentally vulnerable areas, or history of regulatory infractions. See Figure 6.1 for an example. Figure 6.1. Example of one country’s risk classification matrix for food safety inspections Group Risk High Multiple-stage production, complicated production, large volume or large variety of products, and/or production for export. Medium Manufacturers for the local market, utilizing several kinds of production, and/ or small volume production.

Low Small hotels, small restaurants, or any enterprises which is not described above.

Subgroup

Inspections frequency

Very high Does not observe norms

Once per 6 months

Less high Partially observes norms

Once per 1 year

Least Observes norms

Once per 18 months

Very high Does not observe norms

Once per 1 year

Less high Partially observes norms

Once per 18 months

Least Observes norms

Once per 2 years

Very high Does not observe norms

Once per 2 years

Less high Partially observes norms

Once per 2.5 years

Least Observes norms

Once per 3 years

In the second stage, inspectorates road-test the risk identification and entity classification they performed in the first stage. Inspections are conducted using checklists designed to identify sources of risk. As part of the checklist, characteristics about the entities under inspection are recorded to facilitate the classification of entities into different risk groups.

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Inspectorates then analyze the records of these inspections: checklist answers and identification of any infractions. The risk classification performed in the first stage is updated to reflect this new information and more accurately assess risk. In the third stage, inspectorates consider all entities under their jurisdiction in the context of the risk classification. They assign each entity to one of the risk classification groups, and this decision determines the frequency of inspections to be conducted. Inspectorates plan their inspections schedule based on the risk categories. They continue to use the checklists and revise them as needed based on experience. Data collected from the inspections is analyzed on a regular basis and the risk classification groups are updated accordingly. Implementation of risk-based inspections requires up-front investment of time and expertise on the part of inspectorates. Once the system is established, however, it generally frees up inspectors’ time substantially. Best practice inspectorates reallocate some staff from the inspection function to public education or other departments. The end result is an inspections system that efficiently utilizes government resources while providing maximum protection for public health and safety. Figure 6.2. Example of implementation process for risk-based inspections

PREPARATION

PREPARATION Stage 1

Use of scores in audit planning

Initial model estimation

Stage 2

•Risk scores integrated in audit planning procedures •Audits carried out and databases updated

•Model estimated •Risk scores computed

PREPARATION Update of model estimation

Stage 3

•Model reestimated based on new audit data

Define dangers Identify likely causes of these dangers

Conduct inspections

Estimate probability of these causes of danger

Analyze data

Define risk groups & assign frequency of inspections

Classify enterprises by risk groups/subgroups

Plan next inspections based of results of last inspections

Create checklist for enterprises evaluation

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Recommendations Inspectorates should come into full compliance with the Inspections Law requirements by implementing the following measures: 1.

Use checklists in inspections. They should also educate businesses on their requirements under the law, so that fewer violations will occur. Each inspectorate should: b. Develop checklists for all frequent types of business inspections, revising underlying norms as necessary to remove outdated or unnecessary requirements. c. Register all checklists at the Ministry of Justice. d. Train all inspectors on use of the checklists. e. Post checklists online and distribute paper copies to all entrepreneurs whom they inspect.

2.

Send advance notice to businesses. Each inspectorate should: a. Develop an inspections plan, determining which inspectors will visit which businesses and how often. b. Send written notice of the inspection to the business three days before an inspection should occur. This notice should include the checklist against which the business will be inspected. c. Send an inspector to the business on the appointed day.

3.

4.

Develop risk categories for inspections. Each inspectorate should: a.

Develop a strategy for implementation of risk-based inspections.

b.

Create a risk classification matrix for the main types of inspections they conduct.

c.

Use the risk classification matrix to determine which businesses to inspect and how often.

Strictly follow the steps in an inspection. Each inspectorate should: a. Ensure that the decision on inspection results is not taken by the inspector himself. Instead, the head of the inspection department should determine the amount of any fines payable by the entrepreneur, on the basis of the inspections checklist. b. Encourage inspectors to sign the Inspections Registration Book at each and every inspection. c. Establish a suitable record-keeping function to keep track of inspections which have been carried out and their results.

Other steps can be taken which are not requirements of the Inspections Law: 5.

Inspectorates should change the incentives for inspectors, so that they are rewarded for knowing and following the rules. Each inspectorate should: a. Develop a training program for inspectors that covers topics such as: inspector code of conduct; risk-based inspections planning; an inspector’s responsibilities before, during and after an inspection; entrepreneurs’ rights and responsibilities under the Inspections Law; and time management. b. Test inspectors periodically on knowledge of inspections rules, procedures and underlying technical norms. c. Identify and reward those inspectors who most frequently use checklists, send advance notice, and follow other inspections-related procedures. d. Develop a “reform team” within the inspectorate, who will monitor compliance with the Inspections Law, upgrade outdated technical requirements and develop risk-based inspections planning.

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6.

7.

8.

The government of Tajikistan should assist entrepreneurs in the fulfillment of their responsibilities under the Inspections Law. The State Committee on Investments and State Property Management (or another designated body) should: a.

Publish details of inspections procedures, information on the Inspections Registration Book, and all registered checklists on its website.

b.

Introduce a “hotline” for entrepreneurs to call and report suspected violations of their rights during the inspections process.

c.

Use the government’s television and radio stations, as well as Tajikistan’s many business associations, to distribute information about entrepreneurs’ rights and responsibilities under the Inspections Law.

d.

Develop a strategy to ensure that all entrepreneurs have a copy of the Inspections Registration Book and know how to use it.

The government of Tajikistan should assist inspectorates in the fulfillment of their responsibilities under the Inspections Law. The State Committee on Investments and State Property Management (or another designated body) should: a.

Assess all checklists that have been registered at the Ministry of Justice and work with inspectorates to improve any checklists that do not meet the standards identified in the Inspections Checklist Manual.

b.

Develop and provide technical advice to inspectorates who request assistance in the revision of outdated technical norms, the development of inspections checklists, the development of an inspections plan, and the introduction of risk-based inspections.

c.

Collect information on how many inspectors at each inspectorate have been trained on the Inspections Law rules and procedures.

The government of Tajikistan should enforce compliance with the Inspections Law. The authorities should: a.

Conduct periodic reviews of inspectorates’ files to determine whether businesses were inspected in accordance with the inspectorates’ inspections plan, whether checklists were filled in, and whether fines were assessed during or after the inspection.

b.

Institute penalties for inspectors who do not follow procedures (do not sign Inspections Registration Book, do not send advance notice, do not complete checklists, assess and collect fines during the inspection, inspect businesses that are not part of the inspections plan, etc).

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Article 22 - Access to Information on Inspection of Economic Entities in the Republic of Tajikistan 1.

Each economic entity in the Republic of Tajikistan shall have the right to receive information on the inspection of their own operations.

2.

Inspection bodies shall be obliged to provide economic entities with access to information on inspection according to the provisions of the Law of the Republic of Tajikistan “On Information”.

3.

Inspection bodies shall ensure placement of normative and legal acts regulating inspection activities in accessible and visual places (poster panels).

Article 23 - Accounting, Reports and Statistics 1.

Inspection bodies shall be obliged to maintain accounting of all performed inspections of economic entities, outcomes of inspections and provide reports to statistical agencies. Forms and terms of statistical reporting shall be established by the authorized body of the Republic of Tajikistan.

2.

Decisions on inspections, reports and decisions produced based on the inspection results shall be subject to recording in the Registration Book maintained in each inspection body. Forms and procedures to maintain such Books, as well as the procedures of safekeeping inspection reports shall be determined by the Government of the Republic of Tajikistan.

3.

Inspection bodies shall be obliged to publish information on their work in accessible printed matters at least once in a calendar year. Information shall contain the following: --

general information on the structure of the inspection body;

--

statistical data on the quantity of actual inspections, revealed deficiencies, and measures taken on violators;

--

the total amount of penalties imposed based on the results of inspections carried out during the reported period;

--

brief overview on the financing of inspection bodies’ operations related to inspections, on the allocation and utilization of these funds;

--

summary and evaluation of the planned and achieved results;

--

priorities and plans for the following year. Inspections Law

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ATTACHMENT 6.1 – Calculation of economic impact from inspections reform One way to measure the impact of a reform is to calculate the aggregate savings to the private sector it created. IFC SME Survey data indicates that the 2006 Inspections Law and its implementation resulted in annual savings to the Tajik SME sector of $9.3 million. The aggregate figure results from savings of $8.7 million to individual entrepreneurs and $730,000 to dekhan farms, which are offset by an increase in inspections-related costs to small and medium companies of $0.1 million. The cost of inspections to a business includes: --

Direct costs: official fees and unofficial payments

--

Indirect costs consisting of: --

Labor cost: the time dedicated by employees to the inspections process

--

Loss of profits: lost profits for those businesses that are forced to close by inspectors

Inspections-related cost savings to individual entrepreneurs and dehkan farms are driven by: --

A smaller percentage of businesses inspected annually

--

Fewer inspections per business

--

Lower costs per inspection (including official and unofficial costs)

--

Fewer employee days dedicated to inspections

--

Fewer days of stoppage due to inspections

Despite a smaller percentage of businesses being inspected annually, and fewer inspections per business, the total cost of inspections to small and medium companies rose from 2005 to 2007. The increased cost of inspections to small and medium companies is driven by: --

Significant increase in the cost per inspection (including official and unofficial costs)

--

Increase in likelihood of economic activity being stopped due to inspection

--

Increase in days of stoppage due to inspection

Table 6.2 provides a summary description of the methodology IFC used to calculate the $9.3 million economic impact. The methodology is fairly conservative, because it holds constant any indicator which should be unaffected by inspections reform. For example, the average daily salary of an employee is kept at the average rate for 2005, because inspections reform should not affect the

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wage rate. Table 6.3 provides the actual values of each variable used to calculate the cost of inspections to SMEs in 2005 and in 2007. Table 6.2 – Methodology for calculating total cost of inspections to the Tajik SME sector, in 2005 and in 2007 Component of economic impact

Calculation basis

Cost in 2005 to IEs

Cost in 2005 to SMCs

Cost in 2005 to DFs

Cost in 2007 to IEs

Cost in 2007 to SMCs

Cost in 2007 to DFs

Direct administrative costs

(Number of inspections per business per year) * (Official cost of each inspection + Unofficial cost of each inspection)

447 TJS

1095 TJS

102 TJS

133 TJS

1914 TJS

9 TJS

Labor cost

(Daily employee salary) * (Business days of full-time employee time dedicated to inspections)

33 TJS

110 TJS

6 TJS

17 TJS

83 TJS

4 TJS

Loss of profits

(Daily profit loss for an active company stopped because of inspections) * (Business days a company’s activity is stopped due to inspections) * (Probability that a company’s activity is stopped due to inspections)

0.7 TJS

19 TJS

1 TJS

4 TJS

48 TJS

0 TJS

Total cost to one firm in somoni

(Direct administrative costs) + (Labor cost) + (Loss of profit)

480 TJS

1,223 TJS

110 TJS

154 TJS

2, 045 TJS

14 TJS

Total cost to private sector (before taxes)

(Total cost to one firm) * (Number of firms inspected that year)

41, 905,887 TJS

8,982,413 TJS

2,508,744 TJS

11,913,113 TJS

9,541,767 TJS

175,630 TJS

Total cost to private sector (somoni)

(Pre-tax total cost to private sector) * (1 assumed tax rate)

39,391,533 TJS

7,185,931 TJS

2,508,744 TJS

11,198,326 TJS

7,633,413 TJS

175,630 TJS

Total cost to private sector (dollars)

(After-tax total cost to private sector ) * (Average exchange rate for the year)

$12,211,375

$2,227,639

$777,711

$3,471,481

$2,366,358

$54,445

Change in cost by subgroup of the SME sector

(Total cost to private sector in 2007) – (Total cost to private sector in 2005)

($8, 739,894)

$138,720

($723,445)

Aggregate savings to the private sector

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Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Inspections

$9,324,440


INSPECTIONS

Table 6.3 – Inputs to the economic impact analysis Data source

Individual entrepreneurs

Small and medium companies

Dekhan farms

In 2005

In 2007

In 2005

In 2007

In 2005

In 2007

IFC SME Survey

15.3

9.7

11.0

5.1

4.2

1.9

Official cost of each inspection + Unofficial cost of each inspection

IFC SME Survey

29.2 TJS

13.76 TJS

99.50 TJS

375.32 TJS

24.3 TJS

4.9 TJS

Daily employee salary

IFC SME Survey

5.5 TJS

5.5 TJS

5.5 TJS

5.5 TJS

2.1 TJS

2.1 TJS

Business days of full-time employee time dedicated to inspections

IFC SME Survey

6

3

20

15

3

2

Daily profit loss for an active business stopped because of inspections

IFC SME Survey

11.0 TJS

11.0 TJS

53.9 TJS

53.9 TJS

15.9 TJS

15.9 TJS

Business days a business’s activity is stopped due to inspections

IFC SME Survey

3.2

2.3

11.5

14.1

2.7

2.3

Probability that a business’s activity is stopped due to inspections

IFC SME Survey

0.02

0.154

0.03

0.063

0.03

0

Number of businesses in 2005

Official sources

89,000

89,000

7,650

7,650

26,000

26,000

Percentage of businesses inspected in the year

IFC SME Survey

98%

87%

96%

61%

88%

50%

Number of businesses inspected in the year20

IFC SME Survey

87,220

77,430

7,344

4,667

22,880

13,000

Corporate profit tax rate in 200521

Expert estimate

6%

6%

20%

20%

0%

0%

Average exchange rate for 2005

National Bank of Tajikistan

0.31

0.31

0.31

0.31

0.31

0.31

Number of inspections per business per year

Note: Figures in red are not adjusted from 2005 to 2007, because the inspections reform should not impact them. Keeping these figures consistent over time leads to a conservative estimate of impact.

Assumes no growth in number of businesses in the economy from baseline year, but calculation does consider any change in the percentage of businesses inspected. The total number of firms in the economy is kept constant to prevent over-estimation of impact due to overall growth in the economy.

20

No corporate profit tax rate estimated for farms, as they pay a unified agricultural tax based on land area.

21

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ATTACHMENT 6.2 - Status of Checklist Registration22 on July 1, 2009 #

1

INSPECTION BODY State Committee on Protection of Environment

NAME OF CHECKLIST

entities compliance with environment safety Checklist for inspection of nursery Checklist for inspection of business

Ministry of Agriculture

№ OF STATE

REGISTRATION

REGISTRATION

July 29, 2008

№ 431

July 12, 2007

№ 193

March 07, 2007

№ 380

Feb 26, 2008

№ 370

Apr 03, 2008

№ 383

July 24, 2008

№ 426

July 15, 2008

№ 420

Feb 13, 2008

№ 366

Sep 03, 2008

№ 446

Sep 03, 2008

№ 446

Sep 03, 2008

№ 446

Sep 03, 2008

№ 446

Checklist for inspection of business

gardens, greenhouses 2

DATE OF STATE

entities working veterinary sphere Checklist for inspection of business entities involved in livestock breeding Checklist for inspection of business

3

State Agency on

entities compliance with the

Construction and

requirements of license

Architecture

Checklist for inspection of construction facilities

State division on 4

surveillance of safety works in industry and mining (SDSSW)

5

State Committee on television and radio

Checklist for inspection of business entities operating under control of SDSSW Checklist for inspection of business entities involved in TV ad Radio broadcast Checklist for inspection of business entities on compliance with the Law of RT on Natural Monopoly Checklist for inspection of business entities on compliance with the Law of

6

Ministry of Economy and Trade

RT on Advertising Checklist for inspection of business entities on compliance with the Law of RT on Consumer Rights Protection Checklist for inspection of business entities on compliance with the Law of RT on Competition and Limiting of Monopoly at Stock Markets

Anyone can receive copy of checklist from inspections bodies (Article 13, Inspections Law).

22

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#

INSPECTION BODY

NAME OF CHECKLIST

DATE OF STATE

№ OF STATE

REGISTRATION

REGISTRATION

July 18, 2007

№ 291

Aug 15, 2008

№ 437

Oct 29, 2007

№ 315

July 21, 2008

№ 423

July 06, 2008

№ 397

July 06, 2008

№ 398

July 06, 2008

№ 399

July 06, 2008

№ 400

July 06, 2008

№ 418

July 30, 2007

№ 299

Feb 04, 2008

№ 369

Apr 28, 2008

№ 389

Apr 28, 2008

№ 390

Apr 28, 2008

№ 388

Dec 12, 2007

№ 326

Checklist for fire safety inspection of business entities (3 pcs - catering, retail trade and consumer service) 7

Ministry of Internal Affairs

Checklist for fire safety inspection of

(Fire Agency)

business entities operating in the sphere of agriculture Checklist for inspection of service and civil arms (weapons) shops Checklist for inspection of business

8

entities operating (producing,

Ministry of Finance

processing, storing) with precious metals, stones Checklist for inspection of business entities on consumption of electricity Checklist for inspection of business entities on consumption of heat

9

Checklist for business entities that

Ministry of Energy and

transport, store, produce petrochemicals

Industry

Checklist for business entities that transport, store, produce coals Checklist for inspection of business entities compliance with the rules and standards of energy and industry of RT Checklist for sanitary inspection of catering entities Checklist for sanitary inspection of retail trade entities Checklist for inspection of healthcare 11

Ministry of Health (Sanitary Service)

facilities Checklist for inspection of medical laboratories Checklist for inspection of business entities involved in pharmaceutical activities, selling of drugs and other healthcare products Checklist for State inspection of business

12

Agency on standardization,

entities (traders, catering and consumer

metrology, certification

service operating at the markets and

and trade inspection

trade centers) compliance with the requirements of standardization

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#

13

INSPECTION BODY Ministry of Labor and Social Protection

NAME OF CHECKLIST

14 

Communications

entities compliance with Labor Code of

15

Investment and State Property Management

16

Ministry of Justice

17

Ministry of Education

18

19

20

entities in the sphere of communication Checklist for inspection of business

21

22

Checklist for inspection of state bodies on management of state property Checklist for inspection of licensed lawyers Checklist for inspection of educational entities

State Committee on sport

Checklist for inspection of business

and tourism

entities operating in sphere of tourism

State Agency on Land

Checklist for inspection of business

Management, Geodesy

entities operating in the sphere of

and Mapping

geodesy and mapping

State Division on Geology State Division on Protection of State Secrets

REGISTRATION

June 12, 2007

№ 372

July 29, 2008

№ 430

July 05, 2008

№ 427

June 04, 2007

№ 391

July 04, 2008

№ 415

Dec 22, 2007

№ 356

Dec 10, 2008

№ 408

Aug 07, 2008

№ 433

Dec 22, 2008

№ 473

24 July, 2008

№ 425

Dec 12, 2007

№ 374

Nov 26, 2008

№ 457

Nov 26, 2008

№ 458

Nov 26, 2008

№ 459

Nov 26, 2008

№ 460

Nov 26, 2008

№ 461

Nov 26, 2008

№ 462

RT

entities in the sphere of transportation State Committee on

№ OF STATE

REGISTRATION

Checklist for inspection of business

Checklist for inspection of business Ministry of Transport and

DATE OF STATE

Checklist for geological research of subsoil’s Checklist for inspection of business entities in the sphere of

information

security

State Agency on Drug

Checklist for inspection legal circulation

Control

of drugs (narcotics and psychoactive) Checklist for inspection of business entities operating with X-ray machines and computer tomography Checklist for inspection of business entities operating with brachytherapic machines Checklist for inspection of entities

23 

Academy of Science

dealing with nuclear medicine Checklist for inspection of industries operating with radiography and radioisotopes Checklist for inspection of sources of ionizing radiation and radioactive wastes Checklist for inspection of business entities using sources of ionizing radiation

180

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Inspections


7. Taxation

Chapter 7 - Taxation


7

Chapter 7 - TAXATION Key Survey Findings - The average individual entrepreneur and the average dehkan farm each spent 4.6 working days on the filing and payment of taxes in 2007. The average small and medium company spent more than three weeks on the process of filing and paying taxes. - Dehkan farms visited the tax authorities an average of five times in 2007. The average individual entrepreneur made 7 visits, and the average small and medium company visited 10 times. - Only 10% of patent-holders experienced difficulties with payment procedures. - More than one-third of individual entrepreneurs did not keep financial or tax records in 2007, despite the requirement (at the time) that all do so. - 99% of dehkan farms paid the unified agricultural tax. Unless they are engaged in agriprocessing, this should release them from the following tax obligations: land tax, personal income tax, road user’s tax, VAT, and the minimum business tax. However, over 50% of dehkan farms report paying the land tax, and 42% pay the personal income tax. - Individual entrepreneurs are exposed to the most frequent tax inspections, although this figure has improved since 2005. Small and medium companies and dehkan farms are now inspected about twice a year (among those who receive any tax inspections at all). - More than 1 in 3 survey respondents admits that firms like theirs conceal some amount of revenue from the tax authorities. According to respondents, individual entrepreneurs conceal about 25% of their earnings from taxation, and the average for the entire SME sector is also 25%

The tax regime in Tajikistan is characterized by instability and complexity. The Tax Code, which went into effect in January 2005, has been amended 9 times since then. Unfortunately these amendments have not resulted in simplification of tax obligations or improved tax administration. While some positive changes were introduced, such as the new patent, on the whole the tax regime has become even more complicated for the majority of SMEs. An individual entrepreneur has two choices for legal operation: work under patent or under certificate. In March 2008, amendments to the tax code simplified the patent and introduced an alternative certificate system, based on firm turnover, as opposed to the original certificate based on a firm’s profits. The new patent includes all tax obligations for patent holders, consolidating the entrepreneur’s obligations related to personal income, retail trade and social tax. The simplified lump-sum payment exempts the patent-holder from any financial reporting and significantly reduces the scope of tax inspections. The March 2008 amendments also expanded application of the road user’s tax to all businesses (except patent holders), whereas before it applied only to businesses with annual turnover over

182

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TAXATION

600,000 TJS (about $173,160). The road tax, equivalent to 2% of a firm’s reported or assumed expenditures, disproportionately burdens low-margin businesses. While Tajikistan’s ratio of taxation to GDP is still low at 20%, the government has sharply increased its tax revenues since 2002. There are 18 different taxes in Tajikistan, three of which are administered at the local level. Forty-eight percent of Tajikistan’s tax revenues in 2008 came from the value-added tax (VAT). When changes occur in the tax code, it’s important that tax officials receive clear guidance on what the new rules are and how to apply them. Development and dissemination of instructions and manuals on the tax code are moving ahead slowly. The Tax Committee is now using a manual on tax inspections (prepared with IFC assistance), instructions on VAT and a few other instructional materials. Additional instructions are still to be developed for several aspects of tax administration. Unwillingness to pay taxes and concealment of taxable income is a widespread phenomenon worldwide. When compliance is complicated and difficult, the problem of tax evasion is exacerbated as even willing taxpayers are unable to fulfill their obligations. To minimize tax evasion, and thus maximize tax revenue, best practice governments strive for transparent, simplified systems of accounting and reporting to the tax authorities. This is especially important for the 117,000 individual entrepreneurs in Tajikistan, who do not have the financial sophistication to cope with complex tax rules. Efforts to simplify the tax regime for small and medium businesses have often been disjointed, leaving behind a more complex overall regime. For example, the “simplified” system for small and medium businesses is not much simpler than the “standard” system. To comply fully with requirements of the simplified taxation system, small and medium companies must make at least 20 tax filings per year to tax authorities, versus at least 25 under the standard system.1 The average number of tax inspections in 2007 was lower than in 2005. Survey findings reveal that in 2007, tax officials visited the average individual entrepreneurs five times, as opposed to eight times in 2005.

1

Tax authorities include the Tax Committee (central, supervisory body located in Dushanbe) and 68 local tax offices around the country.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

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7

Tax evasion is difficult to measure directly, but survey results indicate that at least 36% of SMEs make an effort to conceal revenues from tax officials. Individual entrepreneurs and small and medium companies who conceal revenue probably hid about 25% of their income in 2007.

7.1 - CURRENT TAX SYSTEM IN TAJIKISTAN - CONTEXT Growing tax revenues Tajikistan’s tax revenues have grown strongly over the last several years, to 3.27 billion TJS in 2008. Between 2001 and 2008, tax revenues grew by 831% in nominal terms. The real growth rate (at 2000 somoni) was 139% over this same period (see chart 7.1). Revenue growth was especially strong in 2007 and 2008 with average nominal growth of about 46% in 2008 (28% in real terms).2 Chart 7.1 - Tax revenues continue to increase sharply Constant 2000 somoni, in ‘000s somoni2 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2001

2002

2003

2004

2005

2006

2007

2006

The growth in tax revenues has consistently outpaced the growth of GDP (see chart 7.2). As indicated below, most tax revenue comes from VAT, levied primarily on imports. Strong growth in remittances in recent years has fueled an increase in imports, leading to the sustained growth in tax revenues. Chart 7.2 - Tax revenues increased 43%, and GDP 28%, from 2007 to 2008 Growth rate, change on previous year 46% 38% 34% 30%

43%

31% 23%

28%

29%

17% 2004

2005

Growth rate of nominal GDP

2006

2007

2008

Growth rate of nominal tax revenues

Source: Based on information of Tajikistan’s State Statistics Committee 2

184

IFC calculation based on GDP deflator, using source data from World Development Indicators and the Ministry of Finance.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

Naturally, Tajikistan’s ratio of tax revenue to GDP has risen since 2001 (see chart 7.3). Yet, a narrow tax base and low levels of taxpayer compliance lead to a ratio of 20% of tax revenue to GDP, still low by international standards (chart 7.4). Medium term approaches to raising tax revenues include simplifying the tax regime to improve compliance, ensuring that the tax system as a whole encourages graduation from small to medium to large taxpayer categories, and eliminating exemptions and privileges. Improving tax administration can broaden the tax base, leading to increased overall tax revenues without increasing tax rates. Chart 7.3 - Tax revenues in Tajikistan have gradually increased since 2001 Tax revenues as % as GDP 20.0% 13.7%

14.7%

15.0%

15.1%

16.6%

16.8%

2001

2002

2003

2004

2005

2006

17.9%

2007

2008

Source: Based on information from the State Statistical Committee

Chart 7.4 - Tax revenues in Tajikistan are very low by international standards Tax revenues as % of GDP in 2006 (more recent data not available)

32.5

33.8

Moldova

30.4

Turkey

36.9

38.1

40.6

Germany

Ukraine

Russia

Latvia

Kazakhstan

21.4

Kyrgyzstan

Azerbaijan

20.2

Turkmenistan

16.8

17.8

Tajikistan

26.8

Source: Index of Economic Freedom, Heritage Foundation

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

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7

A look at the different taxes The Tax Committee does not track tax revenue by sector of the economy, such as individual entrepreneurs versus legal entities versus dehkan farms. Instead, data is collected by type of tax. Revenues from every tax have increased consistently since 2005 (see chart 7.5). The overall growth in tax revenues is driven primarily by increased revenues from value added tax (VAT), but the social tax, income tax, trade-related taxes, excise tax and the road user’s tax also contribute. Chart 7.5. Most tax revenue comes from VAT Tax revenues by type of taxes, in % of GDP

0.9%

Domestic transport tax (motor road users)

0.9%

Excises

9.6%

1.3%

1.5%

Other external taxes on trade and transaction

Individuals income tax

2.1%

3.7%

Social payments Value Added Taxes (VAT) 2005

2006

2007

Other taxes

2008

The Tax Code of 2005 (with subsequent changes) is the basic legal document regulating taxation in Tajikistan. The tax system of Tajikistan consists of 15 national and 3 local taxes. See Attachment 7.1 for a summary of each tax. Rates for national taxes are established by the Tax Code (except for the rates of excise established by the Government), and revenues from them are divided between the national budget and local budgets according to budget legislation. Rates of local taxes are established by local public authorities within the rate limits set by the Tax Code, and local tax revenues flow to the local budget. Taxes can be divided into direct and indirect taxes (see chart 7.6). Direct taxes, such as income or profit taxes, are based on the income or productive assets of the taxpayer. Indirect taxes, such as VAT or excise taxes, are incorporated into the price of the good or service, and the ultimate taxpayer is the population at large. About 80% of VAT tax revenues are from foreign trade.

186

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

Indirect taxes

348

Social payments

336

Others

7

Corporate land tax

Sales tax (aluminium)

14

Individual land tax

Real estate tax

35

Motor road users (ext)

Salex tax (cotton fibre)

56

Single tax for agriculture

2

95

Minimal corporate profit tax

44

111

Corporate profit tax

44

144

Motor road users (dom)

68

246

Individuals income tax

149

Retail sales tax

VAT

1,571

Excises

Chart 7.6 - Direct & indirect taxes in 20083 ’000s in somoni

Direct taxes

Overall tax compliance burden is high The World Bank Group’s Doing Business 2009 report offers evidence that taxes impose a heavy burden on business taxpayers in Tajikistan. The report ranks Tajikistan 159th out of 181 countries on ease of complying with tax obligations. As of June 2008, in Tajikistan it took an average of 54 payments and 224 hours annually to comply with tax regulations for the business used in the Doing Business 2009 case study (operating under the standard regime for small and medium companies). See charts 7.7 and 7.8. Chart 7.7 - Time to comply with tax obligations for a medium-size business Hours per year 1,188

Belarus

Ukraine

448

Russian Federation

Tajikistan

376

Azerbaijan

224

344

Iran

223

271

Kazakhstan

202

Turkey

196

Kyrgyzstan

187

Uzbekistan

105

United Kingdom

Qatar

36

United States

848

Source: Doing Business 2009 3

Based on Ministry of Finance data

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

187


7

Chart 7.8 - Number of tax payments required Number of tax payments in one year Source: Doing Business 2009

99

106

112

75

Belarus

Uzbekistan

Azerbaijan

Ukraine

23

Kyrgyzstan

22

Tajikistan

22

Russian Federation

United States

15

Iran

10

Turkey

9

Kazakhstan

Qatar

1

8

United Kingdom

54

One aspect of the tax burden is the frequency of filing and payment required. Filing refers to the process of completing tax forms and determining the amount of tax to be paid. Generally, businesses prefer to file less frequently (annually) and pay taxes more frequently (monthly or quarterly). A reduction in filings could provide significant compliance relief to taxpayers and to tax officials responsible for processing filings. In Tajikistan, VAT, road user’s tax, corporate tax and social tax all require 12 payments each per year. In Hungary, the best performing country in the region in paying taxes according to Doing Business methodology, companies have to make only 14 payments total per year.4 In addition to reducing the frequency of tax filing, another way to make tax compliance less burdensome is to reduce the total number of taxes paid by combining or eliminating taxes. The new patent in Tajikistan is a good example of this type of reform, which simplifies tax compliance and administration without reducing overall tax revenues (see section below on Taxation of Individual Entrepreneurs).

The marginal effective tax rate for SMEs ranges from 50% to 65% An analysis by the World Bank Group’s Investment Climate Advisory Service in September 2008 found the tax burden in Tajikistan to be very high. This study considered the Marginal Effective Tax Rate (METR), which is the effective tax on an incremental investment by a business. The METR summarizes the effect of the entire tax code on an incremental investment; as a result it is a very useful parameter that summarizes the impact of the tax system on the decision of an investor to infuse capital into his or her business. 4

188

Like many countries, Hungary does require 12 social tax payments per year (as withholding from monthly payroll). Because these payments can be done electronically, the Doing Business methodology records them as one payment.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

The marginal effective tax rate on all Tajik firm types analyzed is over 50%, with the highest effective tax rates paid by patentholders earning less than 200,000 somoni annually. The marginal effective tax rate on individual entrepreneurs engaged in industry approaches 65% for those who pay all required taxes.5 See charts 7.9 and 7.10. Chart 7.9 - Comparison of the METRs for Legal Entities (across Sectors and Regime) Effective tax on an incremental investment 52% 50%

59% 56%

Legal entities (Large Legal entities (Small taxpayers able to source source funds from dofunds from international mestic financial markets) financial markets)

52% 50%

Legal entities (Simplified regime, pay VAT)

Industry

Service

Source: Analysis by World Bank Group’s Investment Climate Advisory Service (FIAS)

Chart 7.10 - Comparison of the METRs for Individual Entrepreneurs (across Sectors and Regime) Effective tax on an incremental investment 65%

Industry

56%

Individual entrepreneurs (<200,000 TJS)

Service

52% 50%

53% 51%

Individual entrepreneurs (between 200,000 and 600,000 TJS)

Individual entrepreneurs (>600,000 TJS)

Simplified tax regime

Standard tax regime

Source: Analysis by World Bank Group’s Investment Climate Advisory Service (FIAS)

Tax compliance burden affects informality High tax rates and complicated filing procedures discourage small firms from operating in the formal sector, contributing to a “shadow economy” of firms who do not pay taxes. Besides not paying taxes at all, another type of informality is when firms conceal revenues to lower their tax bill. According to a report on informality by the United Nations, in 2005 tax evasion amounted to at least 33% of GDP in 2005. 5

Higher METRs for small individual entrepreneurs are driven by assumptions on financing from domestic markets, and the impact of VAT on input costs (which cannot be reclaimed by the individual entrepreneur).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

189


7

Entrepreneurs operating in the informal sector or hiding part of their income are prone to unofficial solutions with government officials, and they deprive the state of tax revenue. Firms who hide revenue for tax purposes may find it more difficult to access external financing, particularly bank loans.

Overview of SME Tax Regimes There are six different tax regimes available to those in the SME sector (see figure 7.1). Individual entrepreneurs can operate under patent or under certificate, and the latter can be calculated on the basis of profit or on the basis of turnover. For both individual entrepreneurs and small and medium companies, the “standard” system is based on profit, while the so-called “simplified” system is based on turnover. Turnover (or revenue) is simpler for the entrepreneur to calculate, and for the tax official to verify, because it involves only the receipt of money. To calculate profit, one must consider a business’s expenses in addition to its revenue. Dehkan farms pay a unified agricultural tax, which is based on land size and not affected by production or profit. If they also conduct further processing on the crops they produce, they must additionally pay profit tax under the standard system applicable to individual entrepreneurs.6 Figure 7.1 - Tax regimes for SME

Simplified system

Standard system

Individual entrepreneurs

Small and medium companies

Certificate Based on profit (personal income) tax

Profit tax

Certificate Based on turnover tax

Turnover tax

Dehkan farms

Unified tax for agricultural producers

Patent Lump sum tax

The rest of this chapter explains these regimes in more detail.

6

190

A small minority of dehkan farms are registered as legal entities, in which case they pay corporate profit tax for processing activities in addition to the unified agricultural tax.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

Tax filing happens in person There is no effective communications infrastructure for the acceptance of tax filings by mail. The Tax Code states that taxpayers can submit their tax declarations in three ways: --

in person,

--

by certified mail, or

--

electronically, when permitted by the authorities.

“…I would like to send reports by email or by post office, but I am not sure whether the tax office will receive it or not. Better to bring it in myself …” – Entrepreneur

In practice entrepreneurs hand over their tax reports in person. Focus group discussions suggest that submission of declarations involves a significant period of time spent waiting in line at the tax office for the appropriate signatures. The signatures required vary by tax office, with unclear procedures and unpredictable schedules of signing officials. In Sughd, for example, business taxpayers report that it takes 1 to 2 days just to submit their declarations each month. They need at least two signatures for each declaration they submit, resulting in unproductive time spent waiting in line to see tax officials. To avoid long waiting periods and to minimize disagreements with the officials accepting the declarations, some entrepreneurs make informal arrangements with a tax official, who will prepare the tax return himself and file it with the tax office. The high number of required tax filings leads to frequent contact between tax officials and entrepreneurs, promoting the development of personal relationships and providing opportunities for corrupt behavior.

Recent tax reforms The Tax Code in Tajikistan in subject to constant modification. Since its introduction 2005, the Tax Code has been amended nine times. Many of these amendments have introduced useful reforms, although others may have been counterproductive. See Table 7.1 for a very brief summary of these changes. Table 7.1 - Recent Tax Changes Affecting SMEs Changes likely to impact SMEs positively

Changes likely to impact SMEs negatively 2008 Introduced minimum business tax for Individual entrepreneurs (Certificate holders only)

Introduction of a new patent, which incorporates all of the patent-holder’s tax obligations into one lump sum

Expanded road users tax Introduced the simplified tax regime for Individual entrepreneurs (Certificate holders only)

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

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7

Changes likely to impact SMEs positively

Changes likely to impact SMEs negatively 2009

Excluded certain types of expenditure (i.e. construction, purchase of fixed assets) from the tax base for calculation of road users’ tax Increased number of days of advance notice before inspections Combined royalty and bonus taxes into one tax

Increased tax rate (5%) of simplified tax on turnover above 200,000 Somoni

Decreased profit tax rate from 25% to 15% for all businesses other than banks, communications, transportation and service businesses Decreased VAT rate from 20% to 18%

In the context of the global financial crisis, the government of Tajikistan has taken steps to stimulate the private sector through tax reform. In April 2009 President Rahmon announced a decrease in VAT and profit tax rates and an increase in the turnover threshold for those in the simplified system (see box 7.1), and these changes were introduced through amendments to the Tax Code on May 19. While a reduction in tax rates may help stimulate the economy, any changes should be implemented with no exceptions. If tax authorities determine that exceptions are necessary, they must be limited and clearly defined to minimize further distortions and confusion related to tax policy.

BOX 7.1 “…To protect our economy from the impact of the financial and economic crisis, create a favorable climate and stimulate domestic and foreign investors, as well as to diversify the export of goods, it would be expedient to grant additional tax privileges to domestic manufacturers and subjects of small and medium entrepreneurship. In this connection, the Government of Tajikistan is instructed to work out and submit relevant normative and legal documents concerning the reduction of value-added tax from 20 percent to 18 percent and profit tax - from 25 percent to 15 percent, as well the removal of other obstacles in the field of taxation. As regards the tax-payers operating according to the simplified system of taxation, the maximum rate of their total incomes should be raised from 600 thousand to 800 thousand somonis…” E. Rahmon, President Republic of Tajikistan Annual speech to Majlisi Oli (Parliament) of Tajikistan April 15, 2009

7.2 - TAXATION OF INDIVIDUAL ENTREPRENEURS The March 2008 Tax Code amendments made major changes to the taxation regime for individual entrepreneurs. The amendments simplified and improved the patent regime, but they also complicated the certificate regime.

192

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

Individual entrepreneurs can now choose between either of two certificates, the standard one based on income tax and the simplified one based on revenue, and the patent. This choice imposes differences in operations and in taxation. Table 7.2 summarizes the various taxes payable by individual entrepreneurs in the three different tax regimes available. Table 7.2 - Three tax regimes for individual entrepreneurs Certificate (Standard Tax Regime)

Certificate (Simplified Tax Regime)

8 - 13% of income7

Not applicable

1% of income

Not applicable

Not applicable

4% of annual turnover under 200,000 somoni; 5% of annual turnover over 200,000 somoni

Up to 3% of any retail sales

Up to 3% of any retail sales

20% of income

20% of income

18% of value added

18% of value added

VAT registration not permitted

Road users tax

2% of expenditures

Not applicable

Not applicable

Customs duty

Varies by import

Varies by import

Varies by excised good

Varies by excised good

Foreign trade not permitted

400 somoni/hectare in Dushanbe

400 somoni/hectare in Dushanbe

Not applicable

Personal income tax Minimum profit tax

Simplified tax from turnover

Retail sales tax Social tax VAT6

Tax on production or import of excise good Land tax (payable by landholders)

Patent

Fixed lump sum which includes all income, social, and retail sales taxes

Patent vs. Certificate The essential operational differences are that individual entrepreneurs working under a patent may not hire employees or conduct international trade, their annual turnover can be a maximum of 200,000 somoni, and they are limited to the economic activities listed on their patent. Certificate holders can hire employees, engage in international trade, conduct any economic up to activity that is not prohibited, and work anywhere in Tajikistan. Table 7.3 shows the operational implications of the individual entrepreneurâ&#x20AC;&#x2122;s choice of tax regime.

7

Incomes below monthly wage are not taxed, amounts above monthly wage and up to 100 somoni monthly are taxed at 8%, and amounts above 100 somoni monthly are taxed at 13%.

8

VAT registration is required for firms with over 200,000 somoni annual turnover.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

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7

Table 7.3 - Operational limitations on individual entrepreneurs working under patent and under certificate Certificate

Patent

No limit9

Up to 200,000 somoni (about $63,000) annual turnover

All activities not explicitly prohibited (e.g. provision of bank services)10

One of 28 categories of economic activity, as indicated on the patent

Anywhere in Tajikistan

One of 68 regions or nationwide, as indicated on the patent

Any size

Maximum building size of 30 square meters

Allowed to import or export?

Yes

No

Allowed to hire employees?

Yes

No

Required to file reports with Tax Committee?

Yes

No

Accounting records

Patent and receipt for the patent only

Maximum size of eligible firms? Allowable business activity?

Allowable geographical area? Allowable size of premises?

Object of review by tax inspector?

The March 2008 amendments drastically reformed the patent system. As of July 1, 2008, patent-holders pay one lump-sum tax consolidating an individual entrepreneur’s obligations related to personal income, retail sales and social taxes. Consolidation of the social tax is especially helpful, since its calculation can prove difficult (see box 7.2). Patent holders do not pay VAT or the road user’s tax. Box 7.2 – Calculation of the social tax If a certificate holder has no employees, he or she pays social tax equal to 20% of his or her declared monthly revenue. However, the declared revenue cannot be less than the monthly minimum wage as defined by the State Statistical Committee. For 2009, the monthly minimum wage is 83 somoni, making the minimum social tax burden 15 somoni. If a certificate holder hires employees, he or she must withhold their social tax and pay it to the Social Fund. Social tax is calculated as follows: - Employer contributes 25% of the employee’s salary - Employee contributes 1% of his or her own salary See box 2.3 in Chapter 2 on Business Registration for a description of critical issues in the administration of the social fund.

The cost of a patent is fixed, according to type of activity engaged in by the entrepreneur. The maximum patent price is 240 somoni (about $70) per month, for transportation of oil, liquid gas and cement by specialized transport, and the minimum patent price is 30 somoni (about $9), for transportation by motor-scooter. 9

Certificate holders paying taxes under the simplified regime face a maximum annual turnover of 800,000 somoni.

10

194

Certificate holders paying taxes under the simplified regime are prohibited from undertaking a few activities (see Attachment 7.2).

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

The March 2008 amendments also changed the certificate regime, but for the worse. The government introduced the â&#x20AC;&#x153;simplifiedâ&#x20AC;? certificate based on turnover (in addition to the existing certificate based on profits); expanded road usersâ&#x20AC;&#x2122; tax (2% of expenditures) to all certificate holders, regardless of size; and instituted a more complicated profit tax requiring advance monthly payments. In addition to the advantages related to a simple and transparent calculation of taxes, the new patent introduced additional benefits over the old system:11 --

The new patent offers an expanded scope of economic activities. The new patent reduces the number of patent categories while broadening the array of economic activities available for patent holders: from 70 patents (1 for each subactivity of 49 categories) under the old system to 28 patents (1 for each category encompassing 169 sub-activities) under the new system.

--

Tax inspections of patent holders are limited to verification that the individual entrepreneur has a patent, that the business activity is allowed per the patent, and that the patent-holder has a receipt of payment for the patent. Before, the patentholder was required to keep a cash register and maintain transaction logs, based upon which the tax inspector would determine tax obligations.

--

Patent-holders are no longer required to maintain a cash register or maintain transaction logs, unless they choose to.

--

The patent does not need to be updated annually.

Individual entrepreneurs prefer the patent system (see chart 7.11). In 2007 more than 69% of entrepreneurs chose the patent, rather than the standard system of taxation (the certificate).12 Tax Committee data indicate that they issued 15% more patents in 2008 than in 2007.

11

Government Resolution #273 from May 30, 2008.

12

Based on data from the Tax Committee.

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7

Chart 7.11 - Two out of three individual entrepreneurs chose the patent system for their business operation in 2007, while small and medium companies are split evenly between simplified and standard tax regimes % survey respondents13 13

99 69 50

50

Simplified

Standard

31

Patent

Certificate

Individual entrepreneurs

Small and medium companies

Simplified Dehkan farms

Survey Findings: Individual Entrepreneurs The IFC SME Survey asks individual entrepreneurs about the difficulties they face in paying taxes. The current survey was conducted in fall 2008, and it asked individual entrepreneurs about their experiences in the calendar year 2007. Thus, the survey results which follow do not take into account the changes in the March 2008 amendments, such as the new patent or the simplified certificate. The survey asked respondents which taxes they pay (see chart 7.12). More than 4 in 5 respondents in the survey were patentholders.14 The next three most commonly paid taxes - the retail sales, social, and personal income taxes â&#x20AC;&#x201C; have been combined into the patent effective July 2008. During 2007, the road userâ&#x20AC;&#x2122;s tax was payable only by certificate-holders with above 200,000 somoni annual turnover, but effective July 2008 it is applicable to all certificate-holders. As a result of these changes, the next survey report should show a different picture of the taxes paid by individual entrepreneurs.

196

13

For individual entrepreneurs, the patent or certificate was part of the selection criteria when surveying firms. Thus, the survey sample matches the real ratio (69/31) of individual entrepreneurs based on Tax Committee data. For small and medium companies, the simplified or standard system was not part of the selection criteria. Thus, the survey data indicate that half of firms choose the simplified system. 99% of dehkan farmers surveyed report paying the unified agricultural tax, thus they are counted as belonging to the simplified system. See Methodology Chapter for more details.

14

Certificate holders are not prohibited from obtaining patents, and vice versa. There is no data available on the average number of patents per individual entrepreneur.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

Chart 7.12 - Individual entrepreneurs pay several different taxes 15 and duties15 Share of individual entrepreneurs who paid the following taxes in 2007 81

46

50

Patent

Retail sales tax

Social tax

Personal income tax

18

Land tax

13

Road user tax

5

9

VAT

Other

4

Real property tax

1.1

Custom duties/ fees

0.9 Excises

35

Half of individual entrepreneurs report paying retail sales tax, which is determined by local tax authorities within an upper limit of 3% of sales. Among those who paid the retail sales tax, the average amount paid was 752 somoni (about $217) for this tax. The average tax burden for the social tax, paid by 46% of individual entrepreneurs, was 349 somoni (about $101). See chart 7.13 for the amount paid for each tax, among those individual entrepreneurs who paid the particular tax. Chart 7.13 - The patent and retail sales tax are the most expensive taxes for individual entrepreneurs Among individual entrepreneurs who paid the tax in question, the amount of money they paid to the tax authorities in 2007 (somoni)16 Patent

772

Retail sales tax

752

Value added tax

441

Land tax

384

Personal income tax

382

Social tax

349

Real estate tax Road user tax

181 112

15

The reference period for the survey (2007) is before the introduction of the new patent in July 2008, which replaced tax obligations on social tax, retail sales tax, and income tax for patent-holders.

16

Data shown only when more than 10 respondents indicated how much they paid on the given tax. The amount spent per tax cannot be added together to arrive at the total tax burden, as not all individual entrepreneurs paid each tax.

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Individual entrepreneurs find trade-related payments (customs duties and excise taxes) to be confusing, as well as VAT (see chart 7.14). These taxes are paid the least commonly (chart 7.12), thus one reason for their difficulty may be that entrepreneurs have fewer friends and colleagues who also pay the tax and might be able to answer questions. VAT administration is difficult by its nature, and focus group discussions indicate that some tax officials mistakenly seek to assess VAT on the entire value of a good, rather than the value added. Among those who pay the taxes in question, 15 to 18% of individual entrepreneurs find land, retail trade, personal income, and road userâ&#x20AC;&#x2122;s tax to be difficult to pay. The patent is both the most commonly paid tax and the least confusing tax. According to the survey, only 10% of patent-holders experienced difficulties with payment procedures. Chart 7.14 - More them half of affected individual entrepreneurs experienced difficulties with procedures of paying custom duties & fees Among individual entrepreneurs who paid the tax in question, the percentage who experienced difficulties 58

18

20

Retail sales tax

Land tax

VAT

Custom duties/ fees

18

36

Excises

16

Other

15

Personal income tax

Real property tax

13

Road user tax

10

Social tax

10

Patent

30

Because there are just 2 employees in the average individual enterprise, it is unlikely that either is a specialist in accounting. Limited background in accounting makes it difficult for many individual entrepreneurs to calculate their tax obligations. Individual entrepreneurs have a much more difficult time with the procedure of paying taxes than do small and medium companies, who may have accountants on staff, or dehkan farms, who face relatively simpler tax rules. No more than 10% of small and medium companies report difficulties in the payment procedure of any tax (see chart 7.23) or 18% of dehkan farms (see chart 7.26). It is important that entrepreneurs under simplified regimes keep books, not only because financial accounting is important for

198

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business operations, but also because it lays the foundation for graduation to more sophisticated tax accounting under the standard regime. According to survey results, more than one-third of individual entrepreneurs did not keep financial or tax records in 2007, despite the requirement (at the time) that all do so (chart 7.15). Among those who don’t keep books, 69% say they don’t want to and 22% admit that they don’t know how (chart 7.16). There is a clear need to increase the availability and quality of taxpayer information, including on record keeping for tax purposes. Chart 7.15 - Where do you keep your financial or tax records? % of individual entrepreneurs 54 37 9 In a notebook

In special accounting forms

I don`t keep records

Chart 7.16 - More than 2 in 3 individual entrepreneurs who don’t keep books claim they don’t want to Among individual entrepreneurs who did not keep financial / tax records in 2007, the % who selected each of three given reasons I don`t want

69

I don`t know how to keep books

22

It is very complicated

10

The average individual entrepreneur spends 4.6 working days on the filing and payment of taxes each year, and makes 7 visits to the tax authorities. Based on survey results, female individual entrepreneurs spend somewhat less time filing and paying taxes than their male counterparts do (see chart 7.17). Chart 7.17 - Female individual entrepreneurs spent less time filing and paying their taxes in 2007 than males did, everywhere except DRS B # of working days 8.0 3.9

2.0

GBAO Male

3.2

1.8

Kulyab

3.0

2.7

Kurgan-Tube

3.6

2.8

Sughd

4.9

5.0

5.7

5.3

3.0

DRS A

DRS B

Dushanbe

Female

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7.3 - TAXATION OF SMALL AND MEDIUM COMPANIES Small and medium enterprises have a choice between two tax regimes: the standard and the simplified regime. Table 7.4 provides an overview of the different taxes under each system. Companies with annual turnover below 800,000 somoni are eligible for the simplified taxation regime, which is based on turnover (gross revenues). This unified tax substitutes for the corporate profit, the minimum business, and the road user’s taxes payable under the standard system. Payment of other taxes remains the same under both systems. In particular, small and medium companies under both taxation systems are subject to VAT if their turnover exceeds 200,000 somoni. The mandatory registration threshold for VAT shows wide variation among European countries, from 0 (Spain, Italy, Hungary) to 80,000 Euro (United Kingdom), with many countries at points in between.17 Businesses must maintain VAT records in a separate journal. Table 7.4 - Taxes of small and medium companies18

19

Simplified tax regime (available for firms with up to 800,000 somoni annual turnover)

Taxes

Standard tax regime

Profit tax

25% of profits for banks, communication, transportation and service businesses; and 15% of profits for other businesses

Minimum profit tax

1% of gross income

Road users tax

2% of expenditure

Turnover tax

Not applicable

4% of annual turnover under 200,000 somoni; 5% of annual turnover over 200,000 somoni

Retail sales tax

Up to 3% of any retail sales

Up to 3% of any retail sales

VAT19

18% of value added

18% of value added

Social tax

25% of employees’ salaries

25% of employees’ salaries

Not applicable

The simplified system does not free small and medium companies from the requirement to keep books for tax reporting. They must keep records of their turnover (gross revenue) to calculate their tax obligations. There is no legally required, uniform format of books to keep transaction records, which sometimes leads to arguments between tax officials and entrepreneurs. Survey results indicate that half of small and medium companies prefer the simplified taxation regime, in which annual turnover rather

200

17

See AGN International’s “VAT: A European Comparison 2009.” http://www.agneurope.org/htm/firm/news/ttf/2009/09vat_broch.pdf

18

These are the taxes are paid by the legal entity, not by its employees.

19

VAT registration is required for firms with over 200,000 somoni annual turnover.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


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than profit determines a firmâ&#x20AC;&#x2122;s tax burden. Firms which operate in sectors with typically high profit margins (and cash transactions) more often choose the simplified system of taxation (see chart 7.18). Chart 7.18 - Most small and medium companies in the services sector operate under simplified tax system % of surveyed small and medium companies Simplified

Standard 77

75 61

56 39

46

49 51

49 51

57 43

57 43

61

57 43

39

25

50 50 35

Total

Construction

Wholesale trade

Retail trade

Production of..

Pharmaceutics

Communication

Catering

Consumer services

Transport

23

Medical services

Consulting services

Tourism, hotel

20

54

44

65

Agro Processing

80

Tax compliance challenges An additional difference between the simplified and standard taxation systems for small and medium companies is the frequency and number of tax payments, as well as the reporting requirements related to these payments. To comply fully with the simplified taxation system, small and medium companies must make at least 20 tax payments to the tax authorities per year, filing a report with each payment. Companies under the standard system make at least 49 payments per year, along with the necessary reports. Those engaged in retail trade, whether under standard or simplified system, also make an additional 12 filings per year for retail sales tax. The system of taxation for small and medium companies is so complex that tax inspectors need professional specialization to ensure proper compliance and cover all exceptions, and entrepreneurs also need to hire experts.

Survey findings Small and medium companies spend much more time on the filing and paying of taxes than do individual entrepreneurs or dehkan farms. This is in part because their business operations are larger, but it also results from the greater number of taxes paid by the typical small and medium company. In 2007, small and medium companies visited the tax authorities about 10 times each. This figure is highest in Dushanbe and lowest

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

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7

in DRS B (see chart 7.19). The overall process of filing and paying taxes required three work weeks for the average small and medium company (chart 7.20). Transport companies spent more than an additional week complying with their tax obligations, as compared to companies in other sectors. Chart 7.19 - In Dushanbe, the average small and medium company visits tax offices almost every month # of times the average small and medium company visited a tax office in 2007 Dushanbe

11

Kurgan-Tube

9

Sughd

9

Kulyab

9

DRS A

8

GBAO DRS B

7 3

Average

10

Chart 7.20 - The average small and medium company spent three weeks on the overall process of filing and paying taxes in 2007 # working days spent filing and paying taxes in 2007, including all staff members involved in the process20 Transport

23

Production of consumer goods

15

Construction

15

Wholesale trade

14

Retail trade

13

Tourism, hotel business

11

Other

11

Average

15

About 49% of the respondents in the survey paid the turnover tax, meaning that they are under the simplified system (see chart 7.21). These businesses should not pay profit, minimum business, or road user’s taxes. Among these companies, the average tax paid for turnover tax in 2007 equals 4,663 somoni ($1,346). See chart 7.22. Small and medium companies are much more likely to pay the social tax than the rest of the SME sector – 92% pay, compared to 83% of dehkan farms and 46% of individual entrepreneurs. Social tax is roughly equivalent to $161 annually for each of the average small and medium company’s 15 permanent employees.21 The

202

20

Data refers to companies with between 5 and 200 employees. Source: Enterprise Surveys

21

The average small and medium company also has 13 contract employees. See SME Overview.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


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majority of entrepreneurs consider the rate of the social tax (25% of the total wage bill) to be very high. The high rate of the social tax raises expenses for hiring labor, interfering with job creation. It encourages tax evasion and favors development of the informal labor market. See box 7.2 for more about the social tax. About 44% of small and medium companies are in the VAT system. VAT is a substantial burden on the small and medium companies who pay it, equivalent to almost 47,000 somoni (about $13,500). Anecdotal evidence suggests that many companies are unable to receive the VAT refunds which they are due. A comparison of charts 7.12, 7.21 and 7.24 shows that small and medium companies pay a greater number of taxes, and a higher percentage pay the taxes in question, than dehkan farms and individual entrepreneurs do. Chart 7.21 - Small and medium companies pay more taxes and duties than the rest of the SME sector, both in number of taxes and in percentage of businesses who pay. Share of small and medium companies who paid the following taxes in 2007. 88

5

Excises

Other

27

20

19

4

Custom Real duties/fees Property tax

Land tax

29

34

30

Retail Corporate Road sales tax profit tax user tax

44

VAT

49

92

56

Turnover Minimum Personal Social tax (simplified) business income tax tax tax

Chart 7.22 - VAT and customs duties and fees impose significant costs on the small and medium companies who pay them Among small and medium companies who paid the tax or duty in question, the amount of money they paid to the tax authorities in 2007 (somoni)22 Value added tax

46,749

Custom duties & fees

28,097

Excises

14,214

Social tax

8,372

Retail sales tax

7,136

Personal income tax

4,663

Corporate profit

4,659

Road user tax

4,171

Minimum profit tax

3,469

Real estate tax Land tax 22

6,447

Turnover (simplified) tax

1,540 859

Data shown only when more than 10 respondents indicated how much they paid on the given tax. The amount spent per tax cannot be added together to arrive at the total tax burden, as not all small and medium companies paid each tax.

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7

Unlike individual entrepreneurs, many small and medium companies have trained accounting staff. Given their relative sophistication, it is not surprising that small and medium companies report relatively few difficulties with tax payment (chart 7.23). Like individual entrepreneurs, small and medium companies find customs duties and fees to be the most complicated.

VAT

9

9

10

Custom duties/fees

Real property tax

9

Road user tax

8

Excises

8

Corporate profit tax

7

Land tax

Minimum business tax

7

Social tax

Personal income tax

7

Retail sales tax

5

6

Simplified tax

5

6

Subsoil user tax

Chart 7.23 - Share of entities who experienced difficulties with procedures of paying taxes and duties Among small and medium companies who paid the tax or duty in question, the percentage who experienced difficulties

7.4 - TAXATION OF DEHKAN FARMS In 2005 the new Tax Code introduced a uniform tax for agricultural producers, designed to include all tax payments. The uniform agricultural tax is a presumptive lump-sum tax, calculated on the basis of the agricultural land plot size.23 The tax payable is independent of the agricultural producerâ&#x20AC;&#x2122;s profits. The tax greatly simplifies tax calculations, as well as the collection process. Dehkan farms are still responsible for paying the social tax, under exactly the same structure as individual entrepreneurs or small and medium companies (depending upon whether the farm is registered under certificate or as a legal entity). Farms also pay import taxes if they directly import inputs, such as fertilizer or seeds. They also pay land tax on any land plots they own which are not used for agriculture. Dehkan farms pay social tax for all employees according to the following calculation, but at least 15 somoni per employee: --

Employer contributes 25% of the employeeâ&#x20AC;&#x2122;s salary

--

Employee contributes 1% of his or her own salary

Due to the uniform agricultural tax, Dehkan farms are exempt from personal income, profit, minimum business, road userâ&#x20AC;&#x2122;s, and value added taxes. However, if dehkan farms also process their crops, they are taxed under the standard regime and must pay personal income tax. 23

204

Cotton farms pay half of the regular uniform agricultural tax.

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Table 7.5 - Taxes of dehkan farms24 Taxes

Dehkan farms who do not process their crops further

Dehkan farms who conduct further processing

Unified agricultural tax

1600 somoni per hectare (for Dushanbe); 4 times land tax rate

1600 somoni per hectare (for Dushanbe); 4 times land tax rate

Personal income tax25

Not applicable

8-13% of income

Minimum profit tax Road users tax Land tax VAT

Not applicable

Social tax

25% of employees’ salaries

1% of income 2% of expenditures Not applicable 18% of value added 25% of employees’ salaries

Customs duty

Varies by import

Varies by import

While the unified agricultural tax is a major step toward the goal of a simple tax system, there are a few remaining problems. The current tax regime stifles the development of processing of agricultural products, especially small-scale production. Also, it creates confusion for farms over whether they owe income tax and how much. Finally, the presumptive tax does not offer any tax relief for farms which are not profitable in a given year.

Survey findings According to the survey, 99% of dehkan farms paid an average of 1,154 somoni ($333) on the unified agricultural tax. See charts 7.24 and 7.25. Unless dehkan farms are engaged in agriprocessing or have additional non-agricultural land, payment of the unified agricultural tax should release them from the following tax obligations: land tax, personal income tax, road user’s tax, VAT, and the minimum business tax. However, over 50% of dehkan farms report paying the land tax, and 42% pay the personal income tax (see chart 7.24). It would be particularly important to identify whether farms are unnecessarily paying land tax, given that it is very expensive on average (1,022 somoni or $295).

24

These are the taxes are paid by the legal entity, not by its employees

25

Incomes below monthly wage are not taxed, amounts above monthly wage and up to 100 somoni are taxed at 8%, and above 100 somoni taxed at 13%. Dekhan farm heads do not pay personal income tax on their own earnings (this obligation is included in the unified agricultural tax), but they do withhold personal income tax on behalf of their employees.

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7

Chart 7.24 - Some dehkan farms may be paying unnecessary land taxes Share of dehkan farms who paid the following taxes in 2007. 99 83

49

52

Unified Agricultural tax

Social tax

Land tax

Real property tax

Retail sales tax

Other

Personal income tax

4

15

Road user tax

3

9

Value added tax

0.3 Custom duties/fees

42

Chart 7.25. The unified agricultural tax, social tax, and land tax are not only the most common taxes for dehkan farms, they are also the most expensive Among dehkan farms who paid the tax in question, the amount of money they paid to the tax authorities in 2007 (somoni)26 26 Unified agricultural tax

1,154

Social tax

1,055

Land tax

1,022

Other

490

Personal income tax

434

Retail sales tax

424

Real estate tax

277

Road user tax Value added tax

233 140

Survey results confirm the simplicity of the unified agricultural tax just 3.5% of taxpayers found it to be confusing (chart 7.26). Among those who pay the personal income tax, 11% of dehkan farms experienced difficulties in paying the tax. Social tax calculation was also relatively difficult, with 9% of payers indicating problems.

26

206

Data shown only when more than 10 respondents indicated how much they paid on the given tax. The amount spent per tax cannot be added together to arrive at the total tax burden, as not all dehkan farms paid each tax.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation


TAXATION

Chart 7.26 - The land tax and personal income tax create confusion for dehkan farms Among dehkan farms who paid the tax, the percentage who experienced difficulties 17.6 11.9

Other

Land tax

10.9

Personal income tax

5.6

Social tax

Road user tax

Unified Agricultural tax

5.5

Retail sales tax

3.8

3.5

Real property tax

9.3

Despite the simplified taxation regime, Dehkan farms still visited the tax authorities an average of five times in 2007. They spent about 4.6 working days to file and pay all taxes in 2007.

7.5 - TAX ADMINISTRATION Tax administration, meaning the processes and procedures involved in the paying of tax, is a burden to SMEs. Their ability to employ highly trained accounting staff to determine tax obligations is generally limited. Small and medium companies, in particular, identify tax administration as an obstacle (chart 7.27). Chart 7.27 - Tax administration, not just tax rates, presents difficulties for SMEs % of respondents identifying as an obstacle to business operations, 200727 54 25

13

Individual entrepreneurs

17 Small and medium companies Tax rates

22

11

Dehkan farms Tax administration

Current tax administration revolves around inspections Theoretically the Tajik tax administration ensures compliance through a system based on self assessment and a risk-based audit. In practice, 27

Small and medium company data refers to companies with between 5 and 200 employees (Source: Enterprise Surveys).

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7

however, tax administration is driven by comprehensive and frequent tax inspections. Inspections are part of the historical development of the tax system in the former Soviet Union, but this legacy system increases contact between taxpayers and tax officials resulting in considerable rent seeking opportunities. The percentage of businesses undergoing tax inspections has fallen since 2005, largely as a result of the 2006 Inspections Law and its implementation. The average rate of tax inspections across the SME sector is 54%. Among individual entrepreneurs, 79% received at least one tax inspection (see chart 7.28). Despite the improvement, Tajikistan’s rate of tax inspections remains high by international standards. In Ukraine, about 50% of legal entities and 56% of sole proprietors underwent a tax inspection in 2008.28 In EU countries, fully and correctly implemented riskoriented tax inspection systems usually cover no more than 3% to 5% of businesses each year.29 Chart 7.28 - Fewer businesses faced tax inspections in 2007, although the rate is still high % of respondents who received at least one tax inspection 96 94

96 79

88

88

93

91

82

54 44

Individual entrepreneurs

Small and medium companies 2002

39

Dehkan farms 2005

SME sector average 2007

Individual entrepreneurs are exposed to the most frequent tax inspections, although this figure has improved also since 2005 (chart 7.29). Small and medium companies and dehkan farms are now inspected about twice a year (among those who receive any tax inspections at all).

208

28

“Investment Climate in Ukraine as Seen by Private Businesses.” World Bank Group’s Investment Climate Advisory Services in Europe and Central Asia, October 2009.

29

The General Tax Directorate of France’s coverage of businesses in 2007, for example, was around 1.8 percent. http://www2.impots.gouv.fr/documentation/rapports/activites/dgi/2007/english_version/dgi_stats_07.htm and http://www.insee. fr/fr/themes/tableau.asp?reg_id=0&id=219.

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TAXATION

Chart 7.29 - Number of tax inspections per individual entrepreneur decreased in 2007 vs. 2005. Average # of tax inspections per year, among those inspected by the tax authorities 8.1

2005

2007

5.2 2.8

Individual entrepreneurs

2.0

Small and medium companies

1.6

1.7

Dehkan farms

Tax evasion remains common Tax evasion often results when taxpayers believe that their tax burden is too high, the penalties for noncompliance will be low, and/or the possibility exists for mutually agreeable, negotiated solutions with tax officials. More than 1 in 3 survey respondents admits that firms like theirs conceal some amount of revenue from the tax authorities (see chart 7.30). Chart 7.30 - The frequency of tax evasion may have increased since 2005 % of respondents who replied that others like them conceal revenues from taxation30 39%

36% 24%

2002

2005

2007

The survey asks firms how much income a business similar to theirs is likely to conceal from taxation. According to respondents, individual entrepreneurs and small and medium businesses conceal about 25% of their earnings from taxation (chart 7.31). Dehkan farms estimate that others like them conceal about 9% of their earnings from taxation. The average for the entire SME sector is 22%.

30

This chart shows the percentage of respondents who gave non-zero answers to the following question: â&#x20AC;&#x153;In your view, what is the approximate percentage of earnings that enterprises, doing similar business in such environment, tend to conceal from taxation?â&#x20AC;? Chart 7.29 shows the average of the non-zero answers.

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7

Chart 7.31 - Individual entrepreneurs may conceal 25% of their earnings from taxation % of earnings hidden, among those who conceal revenues from taxation (according to survey respondents) 25

25

9

Individual entrepreneurs

Small and medium companies

Dehkan farms

Consistent with their low estimates of tax evasion, dehkan farms report low incidence of unofficial payments to tax officials. Individual entrepreneurs and companies are more likely to admit making unofficial payments during the tax inspection procedure (see chart 7.32). Small and medium companies have significantly larger tax bills than individual entrepreneurs or dehkan farms, and 40% of them admit to making informal payments to tax officials sometimes, frequently, usually or always. Chart 7.32 - More than half of individual entrepreneurs and companies report making at least one informal payment to tax officials Frequency of informal payments to tax officials in 2007, % of respondents31 72

47

Individual entrepreneurs Small and medium companies Dehkan farms

43 26 17 18

21

18 7

Never

Seldom

Sometime

4

9

8 1

Frequently

1

5 1

Usually

1

1

Always

7.6 - DIRECTIONS FOR REFORM: RISK-BASED AUDIT Modern tax administrations are increasingly employing risk-based audit to maximize their staff resources and secure government revenue. The use of intensive field audits (tax inspections) can be reduced without affecting government revenue, if the audit function of the tax administration is improved and strengthened.

31

210

Small and medium company data refers to companies with between 5 and 200 employees (Source: Enterprise Surveys).

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TAXATION

A risk-based system for auditing taxpayers will help optimize limited tax authority resources. In Tajikistan, tax officials select subjects of inspection with limited use of information technology and without a risk-based system. The same principles of risk management described in the preceding chapter on taxation apply equally well to tax audit as to the broader category of inspections. Audit selection methods used by tax administrations are principally (OECD, 2004): • Individual screening: a manual selection of audit cases by auditors based on their own knowledge of the taxpayers’ behavior and environment. • Random selection: taxpayers to be audited are selected randomly from the overall population of taxpayers, either through simple random selection (giving all the taxpayers an equal chance of being audited) or more commonly via stratified sampling • Risk-based selection: identifies those taxpayers who are the most likely to be non-compliant (who provide the highest likelihood of yielding large amounts of audit adjustments and penalties) using risk scoring techniques comparable to those used to select clients in banking or insurance One of the most critical aspects of a risk-based audit strategy is the methods and tools used for picking the taxpayers to be audited. Implementation of risk-based audit requires significant available data on taxpayer attributes. See Attachment 7.3 for basic information on the risk-based audit strategies of various countries. Implementation of a comprehensive audit strategy also involves development of training and incentive programs for tax inspectors, ensuring that appropriate information technology is available, and verifying the adequacy of the legal framework for audits.

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7

RECOMMENDATIONS 1. Continue simplification of the certificate regime for individual entrepreneurs, ensuring that it facilitates transition to legal entity status for growing businesses. Begin with an evaluation of whether the July 2008 introduction of an alternative certificate regime has proven helpful to entrepreneurs and tax authorities or whether it has created unnecessary complexity. 2. Adjust calculation of regular profit tax (personal income tax for certificate holders and profit tax for legal entities) to reflect payments already made under the minimum profit tax, in accordance with common international practice. 3. Consider elimination of the road user’s tax, which is inherently regressive and disproportionately burdens businesses with a low profit margin. The road user’s tax discriminates against sectors with a high income level, such as the services sector. Removing road user’s tax would support the consolidation of tax administration into a few taxes, rather than having an exhaustive list of small “nuisance” taxes which increase the tax compliance burden unnecessarily. 4. Elaborate and publicize clear rules about the personal income tax for dehkan farmers. 5. Consider whether decreasing the rate of the social tax may be possible without jeopardizing government revenues. The fairly high rate of the social tax encourages tax evasion and may inhibit job creation in the formal sector. 6. Consider aligning the threshold levels for VAT registration (currently 200,000 somoni) and for the simplified regimes for individual entrepreneurs and small and medium companies (currently 800,000 somoni). 7. Undertake a legal review of the Tax Code in order to reduce ambiguous sections and to limit scope for interpretation. Limit the frequency of amendments to tax legislation to an annual basis, in order to provide a longer-term time horizon for business planning purposes. Less frequent tax changes will also allow the Tax Committee to keep tax officials sufficiently trained on existing legislation. 8. Develop and implement a taxpayer training program, for individual entrepreneurs (under patent and certificate), for small and medium companies (under simplified and standard system) and for dehkan farms. Provide information materials in user-friendly language, and include information on financial record-keeping. Train business association staff on tax rules. 9. Provide compliance relief to taxpayers by reducing the number of filings per year per tax, and by simplifying the forms used to file. Filings should ideally only be required annually or, in the instance of VAT, quarterly. Payments ought to be allowed more frequently, to allow businesses to manage their expenses. 10. Develop a roadmap strategy for the introduction of risk-based audit. 11. Review the various simplified regimes with a view to further simplifying the current structure and better aligning the simplified regimes with the general tax regime. The goal should be to facilitate “graduation” of businesses from individual entrepreneurship to legal entity status.

212

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ATTACHMENTS

ATTACHMENT 7.1. Overview of the taxes required in Tajikistan32

32

Tax

Rate

Tax base

Reporting requirements/Remarks

Personal Income Tax

0.8%, or 13%

Individual Income (salary or commercial activity)

Monthly; individuals

Corporate Profits Tax

25% for banks, communication, transportation and service business 15% for other business

Profits

Paid by Legal entities; Monthly Installments of Tax

Value Added Tax

18%

Value added

Monthly

Excise

Several rates

Sale price of excisable good

On Production/import of excisable good

Social Tax

25% for legal entities; 20% for individual entrepreneurs

Wages for employers; Income from commercial activity for Individual entrepreneurs

Payable Monthly

Land Tax

400 somoni/ hectare (for Dushanbe)

Land area

Paid by landholders; paid in four installments

Mineral Royalties

Negotiated rates (based on list in the Tax Code)

Value of Minerals extracted

Paid monthly

Road Users Tax

2%

Expenditure of legal entities or individual businesses

Paid monthly

Simplified Tax

4% under 200,000 somoni of annual turnover; 5% over 200,000 somoni of annual turnover.

(Net) Gross Income

Those enterprises whose turnover is less than 800,000 somoni can opt in. In lieu of Corporate Profits tax and Minimum profit tax; quarterly reporting period

Tax on Agricultural producers

1600 somoni per hectare (for Dushanbe); 4 times land tax rate

Land Area

Exempt from all other taxes; cultivation of raw cotton â&#x20AC;&#x201C; 2 times the land tax rate

Sales Tax on Cotton and Aluminium

10% for cotton; 3% for Aluminium

Sale Value

Time of sale

Customs Duty

Several rates

Import Value

Time of import

Minimum profit Tax

1%

Gross Income

Paid monthly

Real Estate Tax

10 to 50 times the land tax rate

Floor area of building/ structures

Motor Vehicle Tax

0.1% to 5.5%

Several rates based on Engine Capacity calculated on minimum monthly wage

Any owner of vehicle

Retail Sales Tax

â&#x2030;¤ 3%

On retail sale value

Those engaged in retail sales

Based on Tax code

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation

213


214 All activities allowed

May conduct all activities, except: -- Manufacture of excise goods, -- Supply of cotton fiber and primary aluminum, -- Extractive industries, -- Insurer, -- Investment fund, -- Professional participant of a securities market, -- Credit organization

May conduct activities which are included in Government Decree # 273 from May 30, 2008.

2. By type of activities

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Taxation No

4% of revenue up to 200,000 somoni, and 5% of revenue over 200,000 somoni

18% of value added No

4% of revenue up to 200,000 somoni, and 5% of revenue over 200,000 somoni

1% of income

18% of value added

Based on Tax Code

25% of profit for banks, communication, transportation and service businesses; and 15% for other businesses

VAT registration is required for firms with over 200,000 somoni annual turnover, and firms below the VAT threshold can â&#x20AC;&#x153;opt inâ&#x20AC;? if they want to participate.

35

up to 3% of sales (at determination of local government)

18% of value added

34

Lump sum included in Patent cost

8. Retail sales tax

No

0.3% of expenses for trade, storage, supply and sales activities 2% of expenses otherwise (expenses must be at least 70% of income)

1% of income

18% of value added

No

33

No

7. Simplified tax

Not permitted

No

5. Road users tax

6. VAT35

No

15% of profit34

4. Minimum profit tax

No

No

3. Profit tax

15% of profit

25% of total wage bill for individual entrepreneur or legal entity (paid by individual entrepreneur or legal entity) 1% of salary (paid by employee)

Lump sum included in Patent cost

2. Social tax No

8% of monthly salary up to 100 somoni, and 13% of monthly salary over 100 somoni

All activities allowed

May conduct all activities, except: -- Manufacture of excise goods, -- Supply of cotton fiber and primary aluminum, -- Extractive industries, -- Insurer, -- Investment fund, -- Professional participant of a securities market, -- Credit organization

Lump sum included in Patent cost

No limit

II

Standard regime

Up to 800,000 somoni

I

Simplified regime

Enterprises (legal entities)

1. Income tax

Taxes:

No limit

III

Standard regime

Up to 800,000 somoni

II

Simplified regime

Under Certificate

Individual entrepreneurs

Up to 200,000 somoni

I

3435

1. Maximum annual revenues

Limitations

Under Patent

ATTACHMENT 7.2. Taxation of individual entrepreneurs and legal entities33

7


TAXATION

ATTACHMENT 7.3. Country experience in risk-based tax audits36 Country

USA

Canada

Switzerland

UK

Random audits

Risk-based audits

Workload management

No

• Stratified sampling by taxpayer category, for income tax; • Around 50,000 random audits every year; • Long experience of randomly-selected audits (first program in 1963).

Discriminate function (DIF score), based on prior random samples.

Centralized and automated audit selection.

• Macro-level analysis using time-series econometrics (trends comparison); • Audit selection based on data mining techniques (neural networks, decision, trees).

Centralized and automated audit selection.

No

• Stratified sampling by industry and revenue range, for businesses only; • Yearly program: 1,0002,000 random audits per year.

Yes

• Punctual surveys for specific taxes (mainly VAT returns); • No national program of random audits;

Yes, for 55 % of the audits.

• Simple random sampling for self-assessment taxpayers; • Yearly program: 6,800 random audits per year (10 % of the audits).

No risk-based audit selection strategy.

• Score-based risk assessment (estimation method unknown); • 35 % of the audits; • Regression analysis for VAT returns.

Decentralized and non-automated.

Combination of centralized / automated and decentralized/nonautomated audit selection. Combination of centralized / automated and decentralized/nonautomated audit selection.

Yes, for intelligence gathering

No program

Audit selection based on data mining and other statistical tools (correlation coefficients).

Malaysia

Abandoned in 2001

No program

Audit selection based on data mining since 2001

Centralized and automated audit selection.

Tanzania

Abandoned in 2007

No program

Audit selection based on data mining since 2007

Centralized and automated audit selection.

France

36

Screening

Sources: OECD, 2004, The Commonwealth Association of Tax Administrators, 2007

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Chapter 8: Foreign trade and technical regulation

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Chapter 8 - Foreign trade and technical regulation Key Survey Findings Trade -

Just 2% of dehkan farms, 14% of individual entrepreneurs, and 24% of small and medium companies import goods.

-

Essentially no individual entrepreneurs or dehkan farms are involved in direct exports. Only 3% of small and medium companies export.

-

The average importing SME reports customs wait times of about one week for imported goods.

-

69% of small and medium companies who import report that a gift or unofficial payment was expected or requested of them.

Certification -

36% of SMEs obtained compulsory certificates in 2007, which is a higher percentage than the 18% in 2005 but lower than the 59% in 2002 who obtained compulsory certificates.

-

The certificate process was less time consuming for SMEs in 2007 than in 2005. Small and medium companies spent 10 days obtaining certificates in 2007, compared to 21 days in 2005. Individual entrepreneurs spent 4 days, and dehkan farms 13 days, on certification in 2007.

Despite strong recent growth in Tajikistanâ&#x20AC;&#x2122;s overall trade volumes, the role of SMEs in foreign trade continues to be very small. Less than 3% of small and medium companies, and less than 1% of dehkan farms or individual entrepreneurs, export. Because it is inappropriate to draw conclusions from such a small percentage of respondents, data from survey questions on export-related procedures are not presented here. More SMEs import (2% of dehkan farms, 14% of individual entrepreneurs, and 24% of small and medium companies), thus this chapter does present data on importrelated procedures. Only the largest firms of the SME sector are engaged in trade. The typical exporting SME is a legal entity with annual turnover of about 2.8 million somoni (about $808,000). The average turnover of importing SMEs is about 410,000 somoni (about $118,000). Trade naturally relies on regional cooperation, particularly for a land-locked country like Tajikistan. While the Silk Road once put Central Asia at the very center of world trade, the region now lags behind others when it comes to integration into the multilateral trading system. Kyrgyz Republic is the only Central Asian member of the World Trade Organization (WTO), and Central Asian countries have among the most cumbersome trade procedures worldwide. The World Bank Groupâ&#x20AC;&#x2122;s Doing Business 2010 report ranked Tajikistan 179th out of 183 countries on the ease of trading across borders, and its regional neighbors Afghanistan and Kazakhstan occupy the bottom two

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spots on this indicator. Doing Business finds that the longest average export delays in the world are in Central Asia. Trade transaction costs depend on “hard” infrastructure, such as geography, the road network, railroads, airports, and border crossings. Traders also need good quality “soft” infrastructure, meaning aspects of the business environment like customs procedures, business services, import/export taxes, and technical regulation. Some key difficulties in the hard infrastructure for trade are beyond the government’s ability to change: namely Tajikistan’s landlocked location and the changing trade policies of neighboring countries. Yet much of the soft infrastructure is within government control, and improvements here will enable export/import diversification and broader participation in trade activities. Tajikistan is working towards accession to the World Trade Organisation (WTO), albeit at a slow pace. Perhaps the most serious obstacle impeding Tajikistan’s accession to the WTO is the complex and bureaucratic system of technical regulation inherited from the Soviet Union. A technical regulation is a document adopted by an authority that provides binding technical requirements, either directly or by referencing or incorporating the content of a standard, technical specification or code of practice. Technical regulations may specify the type of product that is not allowable, the type of product that is allowable, or the outcome that is required. By their very nature, technical regulations have an effect on the type of products that can be manufactured. Technical regulations are the most stringent form of government control and should ideally be used only in situations where none of the other options for the regulation of product, outlined above, will ensure the adequate protection of health, safety and the environment.1 Tajikistan’s current system of technical regulation, standardization and compulsory certification is a serious constraint to foreign trade and to the domestic operations of many Tajik traders, producers and retail stores. Regardless of WTO considerations, Tajikistan’s existing system of technical regulation requires reform. Its complexity imposes unnecessary administrative barriers on virtually all businesses who sell goods, whether or not they are engaged in foreign trade. About 36% of SMEs obtained a compulsory certificate in 2007, even though less than one percent are importers or exporters. There are signs of reform. The conclusion required of some export1

APEC Information Notes on Good Practice for Technical Regulation, September 2000.

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ers from the Tajikistan Universal Commodity Exchange, a burdensome document, has been eliminated. Tajikistan became the first country in Central Asia to introduce international cotton quality grading standards, improving the ability of thousands of Tajik cotton farmers to receive a fair price for their exported cotton. Also, three Tajik companies became the first in Central Asia to be certified for two ISO management systems, demonstrating the willingness of the Tajik private sector to engage actively in making their systems consistent with international standards.

8.1 - Context: Multiple Obstacles Related to Foreign Trade and Technical Regulation Businesses in Tajikistan face many challenges that affect their ability to access foreign markets. The road network is generally poor and deteriorating, harsh weather prevents transportation to some parts of the country in winter, rail travel is slow and requires transit through Uzbekistan. Poor roads extend the time to market, and they generate secondary costs, such as additional vehicle maintenance and fuel costs. The prevalence of unofficial payments, inconsistent processes at border points, and Tajikistanâ&#x20AC;&#x2122;s inconsistent diplomatic relationship with Uzbekistan all increase the unpredictability of trade. Time delays and overall unpredictability are even more important than direct costs, since they require businesses to maintain high inventory stocks to hedge against shortages of raw materials or intermediate goods. For the government of Tajikistan, the WTO accession process is an occasion to reform its economic and trade policies in a way that support economic diversification, additional foreign and domestic investment, and deeper regional and bilateral trade links. The accession process itself is beneficial for Tajik entrepreneurs, as it focuses on the development and consistent application of an internationally harmonized system of rules for trade. The accession process promotes transparency and predictability, providing key benefits for the private sector. Thus, successful completion of the accession process will not only broaden access to international markets, but it will also decrease the uncertainty around customs procedures currently faced by Tajikistanâ&#x20AC;&#x2122;s importers and exporters.

Data on Tajikistanâ&#x20AC;&#x2122;s foreign trade The volume of foreign trade in Tajikistan continues to increase every year, to $4.7 billion in 2007, equal to 126% of GDP. This growth was accompanied by an increased deficit in the balance of trade. The trade deficit has widened sharply since 2004.

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Table 8.1 - Trade balance development2 Trade balance

2005

2006

2007

20083

Import, million USD

1,431

2130

3115

3629

Export, million USD

1,108

1455

1557

1504

Trade balance, million USD

(323)

(675)

(1,558)

(2,124)

2002

20084

-42

-42

Chart 8.1 - Trade deficit is increasing Trade balance as a % of GDP34 2002

-10

2002

2002

-8

-7

2002

2002

-14 -24

Like many developing countries, Tajikistan mainly exports raw materials as commodities. Reliance on only a few exports, namely primary aluminum and cotton fiber, makes Tajikistan’s export earnings highly dependent on world commodity prices. Diversification and movement into value-added production for export, such as in the more dynamic fruit and vegetable sector, would lessen Tajikistan’s exposure to global commodity price fluctuations in aluminum and cotton. Chart 8.2 - Tajikistan’s export structure 2007: highly concentrated5 13% Primary aluminum

9% 4%

Electricity Cotton fiber Other

74%

2

Source: National Bank of Tajikistan Banking statistics bulletin, October 2008/ 10 (159), Dushanbe, and NBT website.

3

Source: National Bank of Tajikistan Banking statistics bulletin, 2009/ 2 (163), Dushanbe

4

As of July 15, 2009, the NBT website describes 2008 figures as preliminary.

5

Source for charts 8.2 and 8.3 is NBT website. Data as of 04.29.2009 http://nbt.tj/ en/?c=8&id=8

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Chart 8.3 - Tajikistan’s import structure 4%

2% 3% 2% Other

63%

11%

Alumina Petroleum products Flour Natural gas

15%

Electricity Wheat

One reason foreign trade is particularly difficult for SMEs globally is their inability to capture economies of scale. Small traders in Tajikistan and other Central Asian countries are particularly disadvantaged, as they also operate in landlocked countries. Large exporters generally use full 40 foot containers, while smaller exporters rely on consolidated parcel shipments of one ton. World Bank research shows that small-scale shipments face higher freight tariffs per ton (table 8.2). The research also indicates that even among its neighbors, Tajikistan has some of the highest tariffs. Table 8.2 - Indicative Transport Costs to Antwerp/Rotterdam for Large and Small Exporters6 Freight tariffs in USD/ton (including unofficial payments) Origin of Goods

Full 40’ Container

One Ton Parcel

Dushanbe

Tajikistan

230

500

Khujand

Tajikistan

220

480

Yerevan

Armenia

170

420

Ashgabat

Turkmenistan

200

400

Tashkent

Uzbekistan

175

300

Almaty

Kazakhstan

180

300

Tblisi

Georgia

150

300

Baku

Azerbaijan

163

280

Chisinau

Moldova

100

280

Recent trade-related reforms As many other developing countries have done, Tajikistan has established special economic zones to promote export-oriented industry. Special economic zones can be defined as geographically-delimited areas administered by a single body, offering certain incentives (generally duty-free importing and streamlined customs procedures, for instance) to businesses which physically locate within the zone.7

222

6

Ojala L., Kitain A.and Von Weizsäcker J. (2005), “Tajikistan, Trade and Transport Facilitation audit”, The World Bank. Prices as of Spring 2004.

7

FIAS. April 2008. “Special Economic Zones: performance, Lessons Learned, and Implications for Zone Development”

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Tajikistan has begun development of two free economic zones (FEZs), “Sugd” and “Panj,” and is exploring additional locations, such as Dangara and Ishkashim. In 2008, the geographical boundaries of the Khujand and Panj FEZs were determined. The Sugd FEZ (320 hectares) encompasses about a dozen pre-existing manufacturing businesses located just outside the city of Khujand. The Panj FEZ (400 hectares) is a greenfield space, without any physical infrastructure, near Tajikistan’s border with Afghanistan. The government of Tajikistan is working on improvements to the May 2004 “Law on Free Economic Zones” and on developing the administrative capacity of the existing zones. The growth of these FEZs will create jobs and may create opportunities for SMEs to become suppliers for the generally large firms located within the zones. However, establishment of special economic zones does not mean that the government of Tajikistan can lessen efforts to conduct comprehensive reform of trade policies and procedures. Streamlined processes for zone members will not necessarily carry over into improved trading opportunities for firms outside the zone. If incentives are not designed carefully, special economic zones can result in significant loss of government revenue without delivering suitable social and economic benefits. The existing customs code was adopted in December 2004, and minor changes have been made annually since. The government of Tajikistan is considering further amendments to the customs code, which would bring the customs code into WTO compliance. While still in draft form, the amendments are expected to: •

Clarify and improve the valuation methods for imports

Clarify and improve the method for determining rules of origin

Harmonize customs rules as required by the revised Kyoto Convention8

The transaction passport was a confusing document for SMEs engaged in trade. A form of currency and payment control established by decision of the central bank and the Customs Service, the transaction passport needed to be stamped by officials from the central bank as pre-approval of any international financial transactions related to import or export. In 2007, a decision of the National Bank of Tajikistan and the Customs Service removed the obligation for this procedure when importing goods. A 2008 reform removed the requirement to use the transaction passport at all, by declaring that export-related transactions do not need approval from the central bank.

8

International Convention on the simplification and harmonization of Customs procedures

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Since 2001, exporters of canned agriproducts and certain other goods were required to travel to Dushanbe and obtain a conclusion from the Tajikistan Universal Commodity Exchange (TUCE).9 This procedure imposed high travel costs on those outside Dushanbe, and the conclusion itself cost 0.65% of the export contract value. Fortunately, in December 2008 a government decree abolished any requirements on the obligatory sale of certain goods via the Tajik Universal Commodity Exchange (TUCE).10 This decree eliminated a confusing and burdensome procedure for exporters, particularly of processed agriproducts.

Box 8.1 - Various international organizations support improvements in Tajikistan’s “soft” infrastructure for trade ADB is working on a project to computerize import/export documents, which will facilitate the development of the single window and should reduce the time required for goods to clear customs. In 2008, ADB also helped Tajikistan introduce Universal Cotton Grading Standards by establishing three micronaire labs for assessing cotton fibers, in Khujand, Bokhtar and Dushanbe. EC Customs Modernization Project purchased modern customs laboratories and trained Tajik officials on their use. GTZ Support to Regional Economic Cooperation in Central Asia seeks to increase regional trade between Kyrgyzstan, Kazakhstan, Uzbekistan and Tajikistan. The project focuses on reducing administrative barriers to trade, such as the numerous documents and signatures required to import/export, on creating a single window for export and import procedures and on reducing technical barriers to trade (TBTs) through international harmonization. The ITC Trade Promotion project, funded by SECO, is working on standards to create opportunities for expanding trade in specific sectors. The project began with the fruit and vegetable processing sector, and is now moving into the textile and clothing sector. The project works with companies to identify and remove the main barriers hindering export development in these sectors, including TBTs. Pilot companies involved in agri-processing have increased exports by 40%, and two companies were ISO-certified (see box 8.3). USAID Regional Trade Liberalization and Customs Project began in August 2007 and covers Tajikistan, Kyrgyzstan and Kazakhstan. The project team assists the Ministry of Economic Development and Trade and other government agencies with specific aspects of the WTO accession process, including technical barriers to trade (TBTs), sanitary and phytosanitary standards (SPS), and trade related international property (TRiPS). Also, the project and MEDT are closely coordinating technical assistance related to trade facilitation, the single window, and the single administrative document. WTO Accession Support to Tajikistan project is funded by SECO and implemented by Geneva-based IDEAS. The project team supports the government’s interministerial team for WTO accession, helping them formulate WTO offers, carry out negotiations, and conduct outreach to the private sector, academia and Parliament.

Similarly, the compulsory export license for cotton (again issued by the Tajik Universal Commodity Exchange) was also eliminated. Positive reform can be seen also in the area of cotton grading (see box 8.4). 9

Government Regulation #529-22 “On making amendments to existing regulation” from November 2001.

10

224

Government decree # 126 on December 5, 2008 about “Agency on State Procurement of goods, services and organization of exchange activity.”

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WTO accession and international practices in technical regulation The World Trade Organisation is an internationally harmonized system of rules, designed to facilitate global trade. One of the important steps in the WTO accession process is bringing national policies regarding technical regulation into compliance with WTO requirements. There are many other aspects of becoming a WTO member which fall outside the scope of this report. Regarding technical regulation, WTO members must follow the principles outlined in two WTO agreements, which are part of the WTO package signed by all WTO members. --

The Agreement on Technical Barriers to Trade (TBT Agreement) recognizes countriesâ&#x20AC;&#x2122; rights to adopt the standards they consider appropriate, as long as they do not constitute unnecessary barriers to trade.

--

The Agreement on the Application of Sanitary and Phytosanitary Standards (SPS Agreement) ensures that SPS measures do not represent unnecessary, arbitrary, scientifically unjustifiable, or disguised restrictions on international trade.

To comply with the two agreements above, WTO member countries implement national policies that follow a few general principles, such as: 1. Only the most important restrictions should undergo compulsory control, mainly those which are necessary to avoid major risks, such as fire, explosions or plant epidemics. All other regulations are voluntary, and they are not controlled at the border. Government bodies do not force producers or traders to comply with voluntary standards. 2. Both regulations and voluntary standards are the object of official decisions, specifying the characteristics and performance/security standards of a process or a product. Both regulations and voluntary standards are generally consistent with international standards issued by multilateral technical organizations (such as the International Organisation for Standardisation or the Codex Alimentarius Commission). 3. To prevent conflicts of interest, the function of issuing technical regulations and voluntary standards (standardization) and the function of testing and certifying performance against these standards (certification) are separated into different agencies. Both public and private agencies may certify the conformity of a good with a technical regulation or a standard. Any such agency is officially accredited and then monitored by a specialized public agency (which may be

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the same or a different agency from the one which issues the technical regulations and voluntary standards). Some countries with highly diversified economies and large volumes of international trade move beyond WTO requirements regarding technical regulation. In addition to the basic principle of separation of standardization and certification functions described above, more tasks are separated and put into different agencies: issuing compulsory technical regulations; issuing compulsory sanitary and phytosanitary standards; issuing voluntary technical regulations or sanitary and phytosanitary standards; accrediting and monitoring certification agencies; certifying specific categories of products; and monitoring the entire system of the issuance of regulations and standards and the accreditation function.

Box 8.2 - Definition of terms: technical regulation, standardization and certification Technical regulation is the development, control and issuance of standards and certificates for products and services. Technical regulation can be applied to goods produced for the domestic market or those produced for export. Standardization is the process of establishing a standard. A standard is a document, established by consensus and approved by a recognized body. The standard clearly describes rules, requirements or characteristics for goods, services and methods of production, which are likely to be replicated or reproduced on a large scale and on a long term basis. The process of certification involves testing to an established standard, and providing a mark or some other indication of conformity. Certification testing can be done by a government agency or an independent third-party assessor. The product manufacturer itself will sometimes â&#x20AC;&#x153;self-certify,â&#x20AC;? by making a declaration of conformity. Certification can refer to product or process certification. --

end-product certification means that the product meets minimum standards of quality or performance, as verified by the certification body in a laboratory. Once certified, these products may be endorsed with a quality or certification mark.

--

process certification means that formalized business processes are being applied by the organization, but the certifications do not guarantee quality of end products and services.

Many countries designate a single organization, either public or private, as the national standards body. Certification organizations are generally separate from, and often accredited by, the national standards body. Most product certification occurs at a few well-equipped laboratories, with sophisticated tests taking place at specialized labs in other countries when needed. Compliance with voluntary standards is one way manufacturers and traders can provide comfort to potential customers that their products conform to certain parameters, and therefore can be used further in the manufacturing chain, for example.. Voluntary standards may refer to the management quality of a production process in a plant or an enterprise (like ISO 9001, ISO 14001 or HACCP) or to the technical characteristics of a product.

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The International Organization for Standardization (ISO) is a nongovernmental organization responsible for developing and publishing thousands of voluntary standards. Many countries adopt standards developed by ISO or similar organizations – mainly those concerned with health, safety or the environment – as regulations or refer to them in legislation, for which the standards provide the technical basis. Companies and organizations which adopt ISO standards can pay for a certification audit by an independent, external, certification body. These bodies verify that the company or organization conforms to all requirements specified in the particular standard. See box 8.3 for a description of the first three Tajik companies to become ISO certified. Tajikistan is a correspondent member of the International Organization for Standardization, meaning that it can stay informed of standard development but does not take an active part in technical and policy development work. Adherence to international standards is good for businesses, customers, governments and trade officials. Businesses using international standards find it easier to market their goods and services abroad and benefit from a common technical language. Customers and consumers benefit from quality products and enhanced competition. Governments can understand the char-

Box 8.3 - ISO Certification takes root in Tajikistan The vast majority of ISO standards are highly specific to a particular product, material, or process. However, ISO 9001 (quality) and ISO 14001 (environment) are “generic management system standards”. These generic standards can be applied to any organization in any sector of activity, and whether it is a business, a public administration, or a government department. ISO 9001 contains a generic set of requirements for implementing a quality management system and ISO 14001 for an environmental management system. In March 2009, Tajik Aluminum Company (Talco) became the first Central Asian company to receive the ISO 9001:2008 quality management system certification. Some of the requirements in the ISO 9001 quality management system include: a set of procedures that cover all key processes in the business; monitoring processes to ensure they are effective; keeping adequate records; checking output for defects, with appropriate and corrective action where necessary; regularly reviewing individual processes and the quality system itself for effectiveness; and facilitating continual improvement. In April 2009 two Tajik fruit and vegetable processing enterprises, Elita Istaravshan and Ilmi Istehsoli, became the first Central Asian companies to be certified for ISO 22000 Food Safety Management System. ISO 22000 is an international certification standard that defines the requirements for effective food safety management systems. It can be used by organizations throughout the supply chain – from farmers and ingredient suppliers, to food services, processors, transportation and storage companies, retailers and packaging companies. Both ISO 9001 and 22000 certifications are process certifications. The companies performing the certification audit were DNV Norway (for the fruit and vegetable processing companies) and the Geneva-based firm SGS (for Talco).

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acteristics that products and services are expected to meet on export markets, without having to devote their own resources to elaborating these standards. Trade officials can implement political trade agreements by using international standards to create a level playing field for companies in different countries, ensuring that a consistent set of rules applies to products entering the market from different sources.

WTO accession and technical regulation in Tajikistan WTO accession will enable Tajikistan to broaden and deepen its trading relationships with other countries. The governmentâ&#x20AC;&#x2122;s accession team, led by the Ministry of Economic Development and Trade, is expected to host a working party meeting in fall 2009. Since the last working party meeting in October 2006, the government has changed 23 different laws that support WTO accession, although much work remains to be done. The current technical regulatory system represents a major obstacle to WTO accession, as it does not comply with the general principles outlined in the preceding section. Even more importantly, the existing, complex, bureaucratic system of technical regulation does not satisfy the needs of a market economy. Under the Soviet regime, the government dictated the characteristics of different products and guaranteed consumer safety. Like other post-Soviet countries, Tajikistan inherited this system of thousands of mandatory standards. The current system of thousands of compulsory standards is costly to enforce, and it inhibits Tajikistanâ&#x20AC;&#x2122;s progress from a controlled economy to a market economy. Compliance with thousands of confusing standards is not easy for manufacturers or those who sell their goods. Reform of technical regulation as envisaged in this chapter could reduce the number of compulsory regulations to a few dozen. Tajikistan needs sweeping reform of the technical regulation system. The vast mandatory standards system currently administered by Tajikistandart should be replaced with a simpler system of both mandatory and voluntary standards. Potentially dangerous products should be subject to mandatory technical regulations to avoid major risks, such as fire, explosions and plant epidemics. The thousands of compulsory standards that regulate low-risk products should be abolished at the earliest opportunity. Best practice countries employ 2 stages for comprehensive regulatory reform. They begin with a transitional period when mandatory standards that are still required must be converted into technical regulation according to a predefined process, such as

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a regulatory guillotine (see chapter 4 on Permits). If they are not converted, they become voluntary standards at the end of the period. In other words, they expire. After the transitional period, the government employs mandatory standards in a limited context, according to WTO rules. The Tajik Parliament passed a Law on Technical Regulation in April 2009, which will become effective as of January 1, 2010. To lead to the kind of reform needed in Tajikistan, this law requires amendment. The law does provide a broad legal framework defining technical regulation, introducing this concept into legislation. However, it stops short of laying out a roadmap for standardization and certification reform. Today the government agency TajikStandart is involved in all aspects of technical regulation: issuing the technical regulations themselves, controlling the respect for these regulations at the border, accrediting other agencies and certifying conformity with both compulsory regulations and voluntary standards. To reduce potential conflicts of interest and to meet WTO requirements, the government of Tajikistan must separate TajikStandartâ&#x20AC;&#x2122;s functions into different government bodies for standardization and certification. There should be a similar separation of tasks between accreditation and monitoring of certification agencies on the one hand, and certification itself on the other hand. However, Tajikstandart is not alone in controlling compulsory standards at the border. Several agencies do parallel border controls and conduct inspections at local food markets. Besides Tajikstandart, the phytosanitary inspectors of the Ministry of Agriculture, the inspectors of the Ministry of Health, and (in the case of animals, meat and meat products) the veterinary inspectors of the Ministry of Agriculture all conduct periodic visits to businesses involved in selling goods on the local market. In order to do these controls, these agencies have laboratories, most of which are inadequate due to the poor quality of their equipment. There are perhaps 300 such laboratories in Tajikistan, even though 10 or so well-equipped laboratories would be a better investment of government resources. The European Commission and ADB have equipped several laboratories in Tajikistan with modern equipment and trained personnel on their use.

Repetitive certification Though de jure Tajikistan accepts certificates of some countries (mostly CIS), in practice goods are required to be recertified through authorized domestic agencies. Certificates of conformity with a wide range of national and international standards

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and regulations (e.g., EU, US, and Japan) should be accepted as equivalent to a certificate of conformity with Tajik regulations. The number of compulsory certificates required should also be reduced. Exporters must get a certificate of origin for all of their shipments abroad. Certificates of origin are useful when other countries have a preferential agreement for products from Tajikistan, but for other goods they have little if any use. This step should be made optional. Exports must meet international standards in order to find markets abroad. Often the standards in Tajikistan are not recognized in international markets, therefore some exports must undergo double certification. Imports into Tajikistan generally have already met recognized standards abroad, yet they are often subject to domestic certification requirements. The current system increases complexity for both imports and exports. Repetitive certification of imported goods is economically inefficient. The government of Tajikistan has an agreement with all CIS countries and Iran that 110 goods (representing hundreds of tariff lines) need to be recertified, and other goods can be traded without re-certification. Tajikistan should strive for the elimination of re-certification for any goods which have been certified abroad in any country employing reasonable certification processes.

Box 8.4 - Progress towards cotton grading Tajikistan became the first country in Central Asia to introduce international cotton quality grading standards, which help ensure higher export prices for high-quality cotton products in international commodity markets. In 2007, TajikStandart registered universal cotton grading standards as one of the standards for which it provides conformity assessment. Closed joint stock company Tajikistan-WIS (Wakefield Inspection Services), a Tajik-British venture, was established by a government resolution on October 3, 2008. The company also grades cotton produced in Tajikistan based on Universal Cotton Grading Standards and issues certificates of conformity for cotton fiber. In theory, cotton producers can now choose between a certificate of conformity from TajikStandart or one from Tajikistan-WIS. By August 2009, Tajikistan-WIS certified over 70,000 tons of cotton despite a higher price for its services, while TajikStandart issued only a handful of certificates for cotton. Cotton producers should be free to choose not only whether to have their cotton certified, but also which entity (public or private) to certify the cotton. Certification by private sector companies can result in better service to businesses at lower cost, but only if competition in the certification field is fair. Two other reforms have occurred in the procedures related to cotton export:

230

--

A government decree abolished the requirement for documentation from the National Bank of Tajikistan to permit or support cotton export licenses, starting with the 2008 crop.

--

Introduction of the new cotton methodica (a set of pricing guidelines) has reduced uncertainty and enabled restructuring of the Universal Commodity Exchange of the Republic of Tajikistan.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreign trade and technical regulation


FOREIGN TRADE AND TECHNICAL REGULATION

8.2 - Role of SMEs in foreign trade: key survey findings11 The share of firms who import and export has remained largely unchanged since 2006. About 1 in 7 individual entrepreneur imports, and 1 in 4 small and medium companies. Just 2% of dehkan farms import. Essentially no individual entrepreneurs or DFs are involved in direct exports. Chart 8.4 - Share or firms that import remains small, export far less % of respondents who import % of respondents who export 29 21

19

2002

24

2005 2007

14 14 8

7 1 Individual entrepreneurs

Small and medium companies

2

1

Dehkan farms

0.1 0.2

Individual entrepreneurs

4

3

Small and medium companies

6 0.4 0.4 Dehkan farms

The average turnover of trading firms is much larger than it was two years ago. In 2005, the average turnover of SMEs involved in export and import was 702,000 somoni and 92,000 somoni respectively. In 2007, among small and medium companies the average turnover of exporters was about 2.8 million somoni (about $808,000). The average turnover of importers is about 410,000 somoni (about $118,000). Chart 8.5 - Only the largest of small and medium companies are engaged in foreign trade Annual turnover in `000s somoni 2,877

232 Exporters

11

Not exporters

410

Importers

186 Not importers

The survey asked several questions of firms who export. However, so few SMEs are engaged in export, that these results are not presented in this report.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreign trade and technical regulation

231


8

Chart 8.6 - Across the SME sector, importing firms are significantly larger than those who do not import Annual turnover in `000s somoni 410

186

80 45

34

Individual entrepreneurs

Small and medium companies

Importers

Not importers

22

Dehkan farms

An important aspect of predictability in the trade process is the time for goods to clear customs. Long waiting times, or high variability in time from one shipment to the next, force importers to maintain larger inventories than otherwise necessary. Long waiting times also preclude the import of many perishable goods. Chart 8.7 - Individual entrepreneurs and small and medium companies wait about a week for their imported goods to clear customs12 Calendar days it took on average from the time the establishmentâ&#x20AC;&#x2122;s goods arrived at their main point of entry (e.g., railway station, airport) until the time these goods cleared customs 6.5

Individual entrepreneurs

8.2

Small and medium companies

The average importing SME reports customs wait times of about one week (see chart 8.7). Waiting time shows regional variations, perhaps resulting from the organizational decentralization of Tajikistanâ&#x20AC;&#x2122;s Customs Service. Small and medium companies in Kulyab wait almost three times as long as their counterparts in KurganTube for their goods to clear customs (chart 8.8).

12

232

Data for dehkan farms not shown, due to the low number of respondents who import.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreign trade and technical regulation


FOREIGN TRADE AND TECHNICAL REGULATION

Chart 8.8 - Significant regional variations exist for customs clearance time among small and medium companies Among small and medium companies that import, # calendar days to clear customs 18.6 Average 8.2 4.0

5.0

DRS A

DRS B

6.3

6.9

KurganTube

Dushanbe

7.9

GBAO

10.8

Sughd

Kulyab

Regional variation in customs procedures is not limited to waiting times. To better understand the regulatory constraints and actual challenges faced by SMEs who import and export, IFC conducted focus groups to supplement the data obtained from the survey. Responses from participants of these focus groups indicate that there is wide variation among customs practices, including the valuation methods used and documents required, at customs offices in different regions of Tajikistan. For the first time, the survey asked firms engaged in international trade whether a gift or unofficial payment was expected or requested. Their answers indicate that unofficial solutions are extremely common during import, at least for small and medium companies (see chart 8.9). Chart 8.9 - Unofficial solutions are prevalent during the import process for small and medium companies13 Percentage of importers who replied that a gift or unofficial payment was expected or requested during the import process Individual entrepreneurs Small and medium companies

69 7

8.3 - Certification and SMEs: key survey findings Compulsory certificates vary by sector of economic activity, such as veterinary or quarantine certificates from the Sanitary and Epidemiological Service for livestock owners, certificates of origin from the Chamber of Commerce and Industry for exporters, or cotton certificates from Tajikistan-WIS or TajikStandart for cotton exporters. More SMEs report obtaining compulsory certificates in 2007 than in 2005, although there has been significant fluctuation since 2002 (see chart 8.10). 13

Data for dehkan farms not shown, due to the low number of respondents who import.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreign trade and technical regulation

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8

Chart 8.10 - Number of SMEs affected by certification has fluctuated since 2002 Percentage of respondents who underwent certification in the given year14 88 62

59 36

31

18

SME sector average

Individual entrepreneurs

2002

5

36

28

20

53

23

Small and medium companies

2005

Dehkan farms

2007

Small and medium company respondents in the pharmaceutical, medical services, consumer good production, retail trade, and catering sectors were most likely to obtain at least one compulsory certificate in 2007. Among the numerous individual entrepreneurs engaged in retail trade, only 36% report obtaining a compulsory certificate (see chart 8.11). Chart 8.11 - Frequency of compulsory certification varies greatly by sector Among all small and medium company respondents, Among all individual entrepreneur the % who obtained a compulsory certificate respondents, the % who obtained a compulsory certificate15 100

45

48

52

74

79

79

49

57

67

69

Transport

Catering

Communication

Pharmaceutics

Medical services

Production of consumer goods

Retail trade

Catering

Wholesale trade

Communication

Transport

Agri processing

Other,

Tourism, hotel business

Consumer services

Construction

Consulting services

14

17

Consulting services

36

Wholesale trade

38

57

71

Retail trade

37

53

66

The percentages in chart 8.11 are extremely high, even by regional standards. For example, Ukraine also suffers from a certification

234

14

The very high positive response rate for dehkan farms in 2002 may have been related to the wording of the survey questionnaire in Russian. Farmers who had obtained land use certificates may have responded â&#x20AC;&#x2DC;yesâ&#x20AC;&#x2122; to this question.

15

Data excluded for sectors which represent less than 1% of respondents.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreign trade and technical regulation


FOREIGN TRADE AND TECHNICAL REGULATION

system in need of reform, yet it has significantly lower percentages of firms required to undergo certification (see chart 8.12). In Azerbaijan, only 6% of all small and medium companies surveyed had obtained any compulsory certificates in 2008.16 Survey results indicate that the certificate process is now less time consuming for SMEs. Small and medium companies spent half the time in 2007 obtaining compulsory certificates that they spent in 2005 (see chart 8.12). Chart 8.12 - Frequency of compulsory certification is much lower for companies in Ukraine than those in Tajikistan Among all small and medium company respondents in Ukraine, the % who obtained a compulsory certificate in 2008, by sector17 33% 27%

23% 12%

Hotel, restaurant, cafe

Services

Agriculture

Industry

Survey results indicate that the certificate process is now less time consuming for SMEs. Small and medium companies spent half the time in 2007 obtaining compulsory certificates that they spent in 2005 (see chart 8.13). Chart 8.13 - Certificate Process is less time consuming for small and medium companies Number of days to obtain all certificates 21

6

18 10

13

4

Individual entrepreneurs 2005

Small and medium companies

Dehkan farms

2007

SMEs were required to get more certificates in 2007 than in 2002 (chart 8.14). The exception is dehkan farms, who obtained an average of one certificate in 2002 and in 2007. Small and medium companies, however, obtained more than three times as many certificates in 2007 as in 2002.

16

Source: Azerbaijan IFC SME Survey, 2009.

17

Source: Ukraine IFC SME Survey, 2009.

Business Environment in Tajikistan as Seen by Small and Medium Enterprises: Foreign trade and technical regulation

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8

Chart 8.14 - Individual entrepreneurs and small and medium companies obtained more certificates in 2007 than in 2002 Among respondents who obtained certificates, the average number of certificates obtained in the given year18

1.6

2.4

Individual entrepreneurs 2002

1.6

4.2

Small and medium companies

1

1

Dehkan farms