Last December Kyrgyz President Kurmanbek Bakiyev amended the tax code, significantly increasing taxes for small and medium-sized businesses. A month later the effect of the new tax is being acutely felt, with numerous businesses shutting down and unemployment rising.
In the meantime, the number of people planning to move to Russia and Kazakhstan is increasing, despite the fact that job market in those states is shrinking as well. Kyrgyz experts warn that a combination of these factors will lead to the sudden impoverishment of a large segment of the population in 2009 (www.tazar.kg, January 26). Most small and medium-sized businesses are concentrated in Bishkek but employ people from every corner of the country.
The new tax code testifies to the Kyrgyz government’s incompetence and lack of communication with the business community. The government’s intention was to simplify taxes and reduce tax fraud. Most Kyrgyz experts agree that while it is true that a vast majority of businesses in Kyrgyzstan evade taxes by falsifying documents, Bakiyev’s plan to collect more taxes came at the wrong time. The slowdown of the construction sector in Russia and Kazakhstan has already affected remittances from Kyrgyz laborers there.
Furthermore, taxes were amended at once, with the new rules taking effect within a month. Local entrepreneurs faced unexpected outlays, as the taxes for some businesses rose tenfold. The new tax law was quickly described as an attempt by the president to control all the businesses in the country, but it is actually turning former businessmen into potential public protesters against his regime.
Hundreds of small businesses—such as exchange offices, casinos, saunas, and clothing factories—found themselves on the brink of shutting down (www.tazar.kg, January 26). It became virtually impossible to launch a small business in locations outside of central Bishkek where revenues are low.
For instance, private exchange offices, one of the popular small businesses in Bishkek, will have to pay 20,000 som ($490) a month, compared with 2,000 som ($49) in the past. Exchange offices located in Bishkek’s outskirts have been forced to close. “If Bakiyev had increased the tax by two or three times, we would have been able to work; but with our average daily income of 700 som [$17.40], this is not possible,” the owner of an exchange office told Jamestown.
The law’s property-tax provision affects free economic zones as well (www.24.kg, January 28). This will potentially forestall investments and force already functioning enterprises to close down. Sensing the political implications of the new code, Bakiyev lifted taxes on some enterprises and differentiated taxes according to geographical zones. Yet, the new property tax remains a controversial part of the code.
The country’s economic situation has worsened significantly since last year. Food prices have increased, while the transfer of funds from labor migrants dropped by as much as 50 percent in late 2008. Electricity is shut down after dark in Bishkek, putting an end to the city’s night life.
According to the International Organization for Migration in Bishkek, most Kyrgyz labor emigrants plan to seek employment in eastern Russia. The new higher taxes will discourage them from investing their earnings in businesses in Kyrgyzstan.
Luckily for Bakiyev, this winter has been much less cold than the last, with temperatures rarely falling below freezing. Warmer temperatures have made it possible to conserve electricity and gas, while the government’s electricity rationing has prevented major crises in the hydroelectricity sector.
Political opposition forces, in the meantime, are constantly reminding the public about their plans to pressure Bakiyev into resigning by 2010. Whether the opposition will succeed is difficult to predict. Criminal charges are being filed against most opposition leaders, and Bakiyev has reshuffled more than a dozen posts to ensure support in the government.
“It reminds me of February 2005 when major political change was in the air. Now with no electricity, it feels like a violent change is coming,” Aleksander, a taxi driver from Bishkek, said. In the southern village of Aksy several entrepreneurs gathered spontaneously, without leadership from the opposition, to protest the new regulations (www.akipress.kg, January 27).
In an address to the nation on January 27 Bakiyev promised to reform the government apparatus and implement innovative policies, but the speech was perceived by many as an attempt to cover up his ineffective course of action. The new tax regulation may well be one of the president’s worst decisions, coming at this turbulent time. Along with the inept management of the hydroelectricity sector, Bakiyev’s tax law is quickly turning from a simply economic issue into a deeply political one.