Transcript document

Implicit Taxation of
Uzbekistan’s Cotton
Sector: Estimation and
Consequences
By Sandjar Djalalov,
Swiss Cooperation Office in Uzbekistan
Prepared for the Asian Development Bank and the Ministry
of Economy of the Republic of Uzbekistan (TAR UZB 37148)
State orders and quotas:
State order regulates by amount produced and area
sown;
• Cotton – 100 % purchased by government;
• Wheat – 50 % purchased by government, 50 % for own
consumption and marketing.
•
State regulations of prices:
Price for inputs such as fertilizer and pesticides above
market prices;
• Price disparity between production means and
agricultural products.
•
Diag. Amount of Wheat need to purchase
1 ton fuel or fertilizer
6
Fuel (ton)
4,8
5
4,1
wheat (ton)
4
2,8 3,1
3
2,6
2,4
1,9
2
1,6
Fertilizer
(ton)
3,43,5
2,5
3
2,3
1,7 1,61,8
1,1
1
1
0
1990 1991 1996
1997 1998 1999
2000 2001 2002

Diag. Uzbek Cotton fibre Domestic and World Market prices
2500

1500
Cotton fiber
World price
1000
Cotton fiber
Domestic
price
500
0
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
US dollars per ton
2000

System of pricing
constructed on principle
of «expenses plus»
The high implicit tax to
agricultural production
has been caused by the
overestimated exchange
rate
Local procurement
prices made for cotton
risen from 39% of the
world prices in 2003, to
75% in 2001
Subsidies for agriculture (2004)
• Subsidies for maintenance of agricultural machinery ($30
million);
• Subsidies for fuel and lubricants ($31 million);
• Subsidies on irrigation ($261 million. $69 million of this is
subsidies for electricity);
• Subsidies for fertilizers ($22 million).

Subsidies to Uzbekistan Agriculture
900
800
700
The tendency of
reduction of subsidies
to agrarian sector from
$840 million in 1996
up to 206 mln. USD
was marked in 2002.
428
Mln. USD
600

500
400
68
54
300
200
100
82
43
412
283
299
231
61
191
94
169
42
159
42
194
261
0
1996 1997 1998 1999 2000 2001 2002 2003 2004
Subsidies on irrigation
Input Subsidies
Since 2003 the share
of subsidies for
irrigation increased
due to the higher cost
of electricity.

Reduction of the
subsidizing leads to
growth implicit
taxation, which
strengthens by delay
of payments
Cotton and Wheat sector Net Transfer Estimation calculated by
World Bank and ADB (2003)
Mln. USD
WB calculation
ADB calculation
Exported cotton
Production
target wheat
Total amount
of cotton
Total amount
of wheat
Subsidies
292 034
304 917
186 091
304 917
186 091
Taxes
569 277
566 791
286 571
969 558
546 471
Net Transfers
277 243
261 874
100 479
664 641
360 379
in % GDP
2,82
2,66
1,18
6,76
3,67
Net transfers: 2004
constant price US$
344
325
143
825
448
Total amount of cotton produced
Export cotton
Total amount of wheat produced
Production target wheat
880,500 tons
456,200 tons
5.436,800 tons
2.502,000 tons
Indirect Taxation of Cotton and Wheat Production
2000
1500
1000
1216
840
Mln. USD
505
500
1424
623
432
623
357
629
251
1041
902
206
207
282
117
0
1996-1981997
1998
1999
2000
2001-2422002
2003
2004
-500
-1000
-1500
-837
-1070 -1136 -1177
-1161
-1467
-2000
-1144
-1323
-1631
transfers from agriculture
transfers to agriculture
Net transfers from agriculture
Net transfer and Debt right-off
«Laffeur Curve» and agrarian production of
Uzbekistan

Diag. State tax from 1 ha (2003)
Tax burden
%
Farm income (S$790)
The basic postulate of
Laffeur curve is that
tax "press" up to some
time leads to increase
in tax revenues.
100

A
75
С
Indirect tax (US$470), excluding subsidies
50
Processing and marketing losses (US$100)
25

Liberalization of cotton
pricing and marketing.

Introduction of real
unified Land Tax or,

Export duty on cotton
fiber.
Е
Land tax (US$10)
However reaching up
to the critical point
leads to the increase
in burden and to
reduction of receipts in
the budget.
Profit (US$8)
D
Production cost (US$202)
0
B
US$470
(Acting tax)
Tax sum per hа
Scenarios of tax burden on agrarian sector
Diag. State tax per 1 ha after tax reform
Tax burden
US$
Farm income with yield 6 t/ha
(US$ 2200)

2000
Farm income with yield 4 t/ha
(US$ 1350)
1350
1000
С1
Е2
Land tax (US$350)
730
С
500

С2
E1
Losses in processing and sale(US$50)

E
Production cost (US$450)
0
US$470
US$600
US$750
Tax sum per ha
Liberalization of the
prices and increase in
the rate of land tax.
Downturn of implicit
taxation will increase
productivity, which
increases tax
revenues in State
treasury.
Important condition
remove state order, or
keep only amount as
intermediate step.
Conclusions
Benefits from removing indirect taxation of
cotton and wheat production and the introduction of
price liberalization:
• Introduction of the land tax will make practice of the state
order of cotton and wheat unnecessary. It is supposed, that
tax revenues will increase; the state receive necessary profit;
• Second, necessity of mobilization for the control of
performance of the state orders over cotton and wheat
production will disappear, and necessity of intervention for
affairs of farmers will be reduced;
• Third, from economic point of view, the land tax or export
duties is ideal as it does not distort the price and, hence,
keeps the proved price signals for economy that is very
important for optimum distribution of resources.
Thank You!